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Macro-Economics Theme 2 > 2.6 Macro- Economic Objectives > Flashcards

2.6 Macro- Economic Objectives Flashcards

1
Q

2 Factors Influencing the Value of Money

A

Rate of Inflation
Exchange rate

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2
Q

2 Factors Influencing the Availability of Money

A

Supply of Money
Interest Rate

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3
Q

Monetary Policy

A

Involves changing interest rates, supply of money and credit and exchange rates to influence the economy

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4
Q

What role do banks play in the circular flow between households and firms?

A

Take savings and turn them into investments

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5
Q

What risks are there in the financial system?

A

Banks lose the money, asset from investment value decreases

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6
Q

How does the Bank Of England change the cost of money?

A

Reduce the amount of spending, increase interest rates

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7
Q

Quantitive Easing

A

Bank creates new money electronically to buy government bonds (debt), causing injections into the economy, then sell them later. Also decreases interest rates. Stimulates the economy

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8
Q

Interest Rates

A

Reward for saving/ cost of borrowing (expresses as a percentage of the money saved/ borrowed)

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9
Q

Types of interest

A

Mortgage interest rates
Credit card interest rates and pay day loans
Interest rates on government and corporate bonds.

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10
Q

Types of Monetary Policy: Expansionary

A

Fall in nominal and real interest rates
Measures to expand supply of credit
Increase spending
Depreciation of the exchange rate

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11
Q

Types of Monetary Policy: Deflationary

A

Higher interest rates on loans and savings
Tightening of credit supply (loans are harder to get)
Appreciation of the exchange rate

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12
Q

Limits of Monetary Policy

A

Banks have been reluctant to lend
Low confidence means people don’t spend
Asset prices bubble due to low interest rates
Falling in real incomes for millions of savers

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13
Q

Evaluating Monetary Policy: Liquidity Trap

A

This occurs when a cut in interest rates fail to stimulate the economy

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14
Q

Evaluating Monetary Policy: Cost Push Inflation

A

Higher interest rates will impact on cost push inflation

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15
Q

Evaluating Monetary Policy: Exchange Rates

A

High interest rates can cause an appreciation in the exchange rates which will make exports less competitive

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16
Q

Evaluating Monetary Policy: Time Lags

A

It can take up to 18 months to 2 years for the effects to filter through the economy

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17
Q

Fiscal Policy

A

Governments policy regarding taxation and public spending.

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18
Q

Balanced Budget

A

Government Income (Tax) + Spending is equal

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19
Q

Budget Deficit

A

Government spending is greater than income

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20
Q

Budget Surplus

A

Government income is greater than spending

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21
Q

Crowding Out

A

High government spending causes a fall in private sector spending and investment

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22
Q

Expansionary Fiscal Policy

A

When there’s a low rate of taxation and a high rate of gov spending

23
Q

Income tax

A

How much of income is taxed

24
Q

National Debt

A

Total amount the government owes the private sector and purchases of UK guilts

25
Types of Fiscal Policy: Discretionary
Refers to policies which are decided and implemented by one-off policy changes made by the government
26
Types of Fiscal Policy: Automatic
Tax and spending automatically move round. Tax stabilisers that slow down the fall in AD when the economy enters a recession and restraining when AD increases.
27
Fiscal Stances
Neutral: Balanced Budget Reflationary: Budget Deficit Deflationary: Budget Surplus
28
Fiscal Multiplier
One instance of Gov spending leads to more GDP growth than the value of the initial investment
29
Limits of fiscal policy
Timely- New government expenditures can take time to come into place Targeted- Can be hard to target who the extra spending will effect (Ideally the unemployed) Temporary
30
Welfare spending increasing from the gov and its impact on AD
Poorer people will have a higher propensity to consume so consumption will increase
31
Public spending increasing from the gov and the impact on AD
A large % of workers have public sector jobs and so they'll increase their consumption
32
Increase in government spending on capital and its impact on AD (Consumption)
Capital investment will lead to more jobs and lead to a multiplier effect and more consumption
33
Evaluating Fiscal Policy: How money is financed
If the spending is financed by higher taxes, then the tax rise may counter the higher spending and there'll be no increase in AD
34
Evaluating Fiscal Policy: Crowding out
If the economy is close to full capacity, the higher gov spending will only mean that it takes from private sector
35
Evaluating Fiscal Policy: Inefficiency
If the spending is inefficient
36
Evaluating Fiscal Policy: State of the Economy
If the economy is close to full capacity, the higher gov spending will cause inflationary pressures and little increase in AD
37
Main Objectives of an Economy are
Price stability Growth of real GDP Falling unemployment Higher avg living standards Stable balance of payments Equality
38
Conflict between Objectives: Unemployment and Inflation
Phillips curve: showing a trade off between inflation and unemployment As the rate of unemployment falls, labour shortages may cause an increase in wage inflation
39
Conflict between Objectives: Growth and Inflation
A fast growing economy may see inflation if supply doesn't meet the new demand
40
Conflict between Objectives: Growth and Inequality
A period of rapid growth could lead to greater inequality in people. Profits may reach the rich owners instead of the poorer workers
41
Supply Side challenges: Persistent Productivity Gap
Production is lower than it should be Not much supply available
42
Supply Side challenges: High rates of youth unemployment
Lots of population isn't working and so wont be producing enough to supply a great amount.
43
Supply Side challenges: Regional Economic Divide
London exports more whereas north has less growth and lower employment And so the Uk struggles to improve its production due to less developed parts
44
Supply Side challenges: Rise of Emerging Nations
Output of those countries expand Investment goes to them and Uk struggles to compete
45
Supply Side challenges: Low capital Investment and research
No improving equipment to improve output
46
Supply Side challenges: Structural trade deficit
High imports and low exports due to not being productive enough
47
Supply Side challenges: Low growth rate of real GDP
Uk economy growing at a slower rate means less GDP/ capita compared to other countries
48
Purpose of Supply side policies
Focus on improving the structural long term performance of an economy
49
Market led policies
Designed to make the market work better and give the private sector more freedom e.g. cutting gov spending to keep taxes low, reducing red tape, lower income taxes, lower business taxes
50
Government led policies
Government intervention in markets to overcome different types of market failure State investment in public services and infrastructure Commitment to a minimum wage and/ or living wage to improve work incentives and productivity Higher taxing on wealthy to fund public and merit goods Regional policy to fund and aid under-performing areas
51
Production is...
Value of output of goods and services
52
Productivity is...
A measure of the efficiency of factors of production Measured by output/ person employed or output/ person an hour
53
Causes of UK productivity gap
Low rate of new capital investment Banking crisis affecting lending to businesses Possible slowing rates of innovation Skill shortages Low levels of market competition Low AD and high spare capacity
54
Evaluating Supply side policies
Time Lags AD is equally important Some supply side policies may lead to greater inequality State intervention can risk gov failure Sustainability issues from any negative externalities

Macro-Economics Theme 2 (5 decks)

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