2.6 Macroeconomic Objectives Flashcards
Name the 7 macroeconomic objectives
Balance of payment equilibrium
Economic growth
Low unemployment
Low and stable inflation
Balanced budget, Environment, Greater income equality
How does economic growth aims differ in developing vs developed countries?
Developing focus on development over growth
What is the ideal unemployment rate
Ideally under 2%
UK inflation target and why
2%, stability for customers and firms
Name 3 instruments of monetary policy
Interest rates
Money supply
Exchange rate
How do interest rates effect inflation
Inverse relationship - increasing rates reduces inflation and vice versa
Define the face value of a bond
amount that will be received when bond matures
Define the maturity date of a bond
Date on which government will repay bondholder e.g. 2, 5 or 10 years
Define the coupon value and coupon date of a bond
Amount of interest that will be paid and when the interest will be paid
Define the yield of a bond
Interest as a % of market price
Define a bond
A way for the government to borrow by taking a ‘loan’ from a consumer/firm
Formula for yield of a bond
coupon value / face value
What is quantitative easing
The central bank buying bonds to push up their prices and bring down long-term interest rates, therefore stimulating spending
Name 3 ways QE impacts AD
- Those who sell bonds have more funds for investment
- Long Term interest rates fall, so interest rates tend to fall, increasing spending
- Weaker currency due to lower domestic interest rates (due to hot money outflow) so trade balance improves
How does QE help banks
Increases liquidity and lending so spending can increase
Why was QE so important after the financial crisis in 2008?
Interest rates too low so QE was used - bough bonds from financial institutions - this gave banks liquidity and money supply was increased which increased AD
Name 3 arguments in favour of QE
• Central bank need additional policy instrument when interest rate cuts aren’t stimulating AD
• Stop fall in real GDP and onset of deep depression / even lower unemployment
• Lower long term interest rates have kept business confidence higher
Name 3 risks of QE
- Risky as could cause hyperinflation
- No guarantee higher asset prices lead into higher consumption – confidence could still remain low
- Concerns banks can become reliant on it when it is not meant to be permenant
Name 6 considerations when setting interest rates
- GDP growth and spare capacity
- Bank lending and retail sales
- Share prices and house prices
- Consumer and business confidence
- International data
- Commodity market prices
Name 3 advantages of demand side monetary policy
• Interest rates have powerful effect on C
• Bank of England is independent from government • Interest rates can be adjusted monthly
Name 3 disadvantages of demand side monetary policy
• Time lag – 18 – 24 months
• Money supply difficult to control
• Different parts of the economy might need a different approach e.g. services
booming, and manufacturing failing
Name the 2 biggest sources of gov revenue
Income tax and VAT
Define direct and indirect taxation
• Direct = cannot be passed on to others
• Indirect = can be passed on (in part) to consumers in higher prices
Name 2 examples each of direct and indirect taxes
Direct: income, corporation
Indirect: excise duty, VAT
