2.6 Macroeconomic objectives and policies Flashcards
what are the 7 macroeconomic objectives?
1) 2% +- 1% inflation
2) economic growth
3) reduce
unemployment
4) current account equilibrium (inflows= outflows)
5) balanced budget (government spending= tax revenue)
6) reduce inequality
7) environmental sustainability
what are the stages in the trade cycles/ business cycle?
.slowdown
.boom
.Recession
. recovery
define a recession
two consecutive quarters of negative economic growth
define the term boom in the business cycle?
The part of the business cycle where real GDP is at its highest.
define the term slump (slow down) in the business cycle?
The part of the business cycle where real GDP is decreasing.
define the term recovery in the business cycle?
The part of the business cycle where real GDP is increasing.
what is the difference between actual gdp and potential trend gdp?
actual GDP= Refers to the real, measured increase in a country’s GDP over time. (T)
potential trend GDP= Represents the long-term average growth rate of an economy’s productive potential.
define a negative output gap?
when the economy isn’t using its resources efficiently
define a positive output gap?
when the economy is producing above its potential. (overuse of resources)
define Potential Trend GDP
The sustainable rate of GDP growth caused by improvements in productive capacity overtime.
define business cycle
fluctuations in real GDP overtime
define demand-side policy
a policy which mainly affect aggregate demand e.g. income tax
define supply-side policy
a policy which mainly affects aggregate demand e.g. vocational training.
.all ssp’s are managed by the government
what are the types of demand-side policies?
fiscal policy= a policy that used government spending and taxation, to affect the economy as a whole.
monetary policy=
define expansionary fiscal policy/ loose fiscal policy
when the government decreases taxes, but increases government spending, which causes a budget deficit.
define Contractionary fiscal policy/ tight fiscal policy
Contractionary fiscal policy is when the government raises taxes
and cuts government spending, in order to improve the budget deficit.
who is responsible for the inflation target in the uk?
the bank or england
what is the benefits trap?
The benefits trap is when workers are better off staying unemployed and on benefits than working and earning an income.
define cooperation tax
A direct tax on the profits made by a firm.
define infrastructure
Items needed for businesses to operate such as roads and telecommunications networks.
define monetary policy.
Monetary policy is when the central bank manipulates the base interest rate or the money supply in order to influence aggregate demand.
define expansionary monetary policy
when the central bank decreases the base interest rate, in order to increase AD, to increase inflation.
define contractionary monetary policy
When the central bank increases the base interest rate, in order to decrease AD, to reduce demand pull inflation.
define base interest rate
The rate at which the central bank will lend to high-street banks
define quantitative easing
Quantitative easing is when the central bank buys financial assets such as bonds from high street banks. This increases the money supply for high street banks, which increases the amount of money that banks can lend.
what is the advantage and disadvantage of quantitive easing?
Quantitative easing is where the central bank buys financial assets from high street banks. This gives them more money to lend out to consumers and businesses. This will increase consumption and investment which will increase aggregate demand.
However, the increase in the money supply may cause an increase in the price level. High inflation could become hyperinflation.
how was the great
depression caused?
A commitment to the gold standard lead to a decrease in the money supply, so banks have less money to lend out, so firms will decrease investment, so AS will decrease, so GDP falls, leading to negative economic growth.
how did the us government cause the great depression in 1929? (to correct a fall in us stock price because of imports.)
Herbert Hoover’s government introduced restrictions on imports, which led to a collapse in world trade. In addition, it engaged in contractionary fiscal policy. Finally, Hoover’s government increased interest rates.
how did the uk respond to the great depression?
To tackle the
2008 Financial Crisis, the UK used monetary policy to reduce interest rates and engage in Quantitative easing.
