2.6 macroeconomic objectives and policies - definitions Flashcards
Demand-side policies
Policies to change the level of Aggregate Demand in the economy
Fiscal Policy
Policies that change the level of Public spending, taxation or borrowing in order to manage the level of Aggregate Demand.
Expansionary fiscal policy
Tax cuts/spending increases designed to boost Aggregate Demand.
Contractionary fiscal policy
Tax rises/spending cuts designed to reduce Aggregate Demand.
Budget Surplus
Tax revenue exceeds public expenditure
Budget Deficit
Public expenditure exceeds tax revenue.
Government Bonds
The Government sells bonds to pay for its borrowing.
Automatic stabilisers
When the economy goes into recession, Government spending will rise automatically. Because Public spending will go up because unemployment benefits increase tax revenues fall
Discretionary fiscal policy
The Government deliberately decides to change taxes or spending to boost or slow down the economy. Discretion means it is an actual Government decision, not an automatic change.
Monetary policy
Decisions made by the Bank of England that change the money supply and the interest rate
B of E MPC
The organisation that runs Monetary policy in the UK. Sets interest rates for the whole economy. They meet once a month.
Inflation Target
2%, plus or minus one. Measured on the CPI. Symmetrical target.
Expansionary monetary
Interest rate cuts which boost Aggregate Demand
Contractionary monetary
Interest rate rises which reduce Aggregate Demand.
The zero-rate problem
Interest rates cannot cut interest rates below zero. The real interest rate, is the nominal interest rate minus inflation. So even though the Bank has cut the interest rate as low as it can, falling prices will mean that the real interest rate is positive and it could be rising.
Quantitative Easing
The Bank of England electronically creates new money to try to boost the economy by using the new cash and uses it to buy assets - usually Government bonds which will increase demand for them, pushing the price up. When the price of bonds rises, the interest rate falls and asset prices rise. This should boost AD through raising C and I.
Credit Crunch
Events in 2007-2008 that led to the Great recession. US House prices fell. Banks around the world which had lent too much money on US mortgages began to lose money and some went bankrupt. Business & confidence fell rapidly, sparking panic and a global recession.
Supply side policies
Policies design to boost the productive potential of the economy or shift the LRAS curve to the right.
SSP Examples
Market-based:
-Income tax cuts / Corporation Tax cuts.
-Benefit cuts or lower minimum wages.
-Deregulation to reduce business costs.
Government interventionist based:
-Education and skills spending.
-Infrastructure spending (transport etc.)
-Government-sponsored Research and Development spending.
The Phillips Curve (Short Run).
A curve that shows the relationship between inflation and unemployment in the short run. The original downward-sloping Phillips Curve showed that there was a trade-off between inflation and unemployment.
The Long-run Phillips Curve
A vertical Phillips Curve. This shows that in the long-run there is no trade-off between inflation and unemployment. You cannot reduce the unemployment rate without inflation increasing.
NAIRU
The Non-Accelerating Inflation Rate of Unemployment. The rate of unemployment at which the inflation rate is stable – if it falls lower, inflation begins to accelerate.
