2.6 Macroeconomic Objectives & Policies Flashcards
what is the aim of demand side policies
to shift AD
what are the two types of demand side policy
monetary (Bank of England) and fiscal (the Government)
what are the two main methods of monetary policy
interest rate adjustments
quantitative easing (QE)
what are the two main methods of fiscal policy
government spending
taxation
what is a balanced government budget
government revenue = government expenditure
what is a government budget deficit
government revenue < government expenditure
what is a government budget surplus
government revenue > government expenditure
how is a budget deficit financed
public sector borrowing
what are direct taxes
taxes on income and profits paid directly to the government by an individual or firm
what are indirect taxes
taxes imposed on spending paid by the supplier
what is the purpose of expansionary or contractionary demand-side policies
to increase or decrease AD
what are the main expansionary demand-side policies
reducing taxes
decreasing interest rates
increasing government spending
increasing QE
what are the main contractionary demand-side policies
increasing taxes
increasing interest rates
decreasing government spending
decreasing/stopping QE (QT)
what do the Bank of England’s Monetary Policy Committee (MPC) do
meet 8 times a year to set monetary policy, discussing QE and the Bank Rate. However it can take up to 2 years to see the effects of their changes
what is the Bank of England’s inflation target
2%
what influences the decisions made by the MPC
state of the economy
real GDP growth
CPI inflation
interest rate elasticity
state of the property market
unemployment rates
business/consumer confidence
exchange rates
what are the strengths of monetary policy
the Bank of England operates independently of the government
can consider long-term outlook
targets inflation and maintains stable prices
depreciating currency can increase exports
what are the weaknesses of monetary policy
time lags between policies implemented and effects
less effective when in a negative output gap (when confidence is low)
cheaper credit can cause inflation long-term
what are the strengths of fiscal policy
spending can be targeted on specific industries
shorter time lags to become effective
promotes equality through taxation
increased consumption of public goods
increase in LRAS
what are the weaknesses of fiscal policy
policies can change rapidly as governing parties change
increased government spending can create a budget deficit, which may lead to austerity in future
crowding out
time lags/information failure
what are the two types of supply-side policies
interventionist and market-based
what are interventionist supply-side policies based on
government intervention in order to increase full employment (Yfe)
what are market-based supply-side policies based on
removing obstructions in the free market
what are the three aims of market-based supply-side policies
increase incentives
promote competition
reform the labour market
how do market-based supply-side policies increase incentives
reducing income/corporation tax
restructuring unemployment benefits to incentivise the unemployed to seek work
how do market-based supply-side policies promote competition
privatisation & deregulation
trade liberalisation
how do market-based supply-side policies reform the labour market
decreasing trade union power so wages can be decreased
decreasing minimum wages to lower costs of production
what are the four aims of interventionist supply-side policies
promote competition
reform the labour market
improve the skills and quality of the labour force
improve infrastructure
how do interventionist supply-side policies promote competition
increased government spending on innovation
subsidies to firms promotes international competitiveness
how do interventionist supply-side policies reform the labour market
increased government spending on improving occupational mobility
how do interventionist supply-side policies improve the skills and quality of the labour market
increased government spending on education and training
increased government spending on healthcare
how do interventionist supply-side policies improve infrastructure
increased government spending on infrastructure
what are the strengths of supply-side policies
increase the rate of growth in an economy
reduce average price levels
reduce unemployment
increase value of net exports
can improve quality of life for citizens
what are the weaknesses of supply-side policies
worsens inequality
expensive to implement
significant time lags between expenditure and results
changes in government may change/reverse long-term plans
what is the role of automatic stabilisers in a recession
government spending increases - more benefits and transfer payments/job seeking allowances)
taxation decreases - less direct and indirect taxes
what is the role of automatic stabilisers in a boom
government spending decreases - less benefits and transfer payments
taxation increases - more direct and indirect taxes
what is the Keynesian view on output gaps
government action IS required
what is the classical view on output gaps
no government action required
what are the objectives of expansionary demand-side policies
boost growth
reduce unemployment
increase inflation
redistribute income
what are the objectives of contractionary demand-side policies
reduce inflation
reduce budget deficit/national debt
redistribute income
reduce current account deficit
how did the USA use fiscal policy in the Great Depression
Roosevelt’s New Deal provided lots of government spending on infrastructure (Keynesian approach to increase AD)
the government employed lots of people and started big construction projects such as The Golden Gate Bridge and Hoover Dam
protectionism increased to increase domestic production and consumption
entry into WWII boosted government spending
how did the USA use monetary policy in the Great Depression
the Federal Reserve cut the bank rate from 6% to 4%, although this was then raised again later the same year to strengthen the exchange rate. this was a contractionary monetary policy
how did the UK use fiscal policy in the Great Depression
the government prioritised a balanced budget with contractionary policies to avoid crowding out
cut public sector wages and unemployment benefits, which further reduced consumption and confidence
raised income tax which decreased disposable income and confidence
introduced a 10% tariff on all non-British colony imports to increase production and consumption domestically
how did the UK use monetary policy in the Great Depression
stopped using the gold standard which had appreciated the Pound
the Pound depreciated by 25% which increased exports and thus AD
Bank Rate lowered from 6% to 2% which increased AD
how did the USA use fiscal policy in the 2008 Financial Crisis
Keynesian approach with lots of government spending and expansionary fiscal policy
banks were supported by the government
government acts that injected vast amounts of money into the economy which increased AD
how did the USA use monetary policy in the 2008 Financial Crisis
Bank Rates were cut from 5.25% to 0.25%
three rounds of QE injected trillions into the money supply
how did the UK use fiscal policy in the 2008 Financial Crisis
Keynesian approach with significant government spending and expansionary fiscal policy
banks were supported by the government
tax cuts
injections and investment
later a switch from expansionary fiscal policy to austerity
this delayed the recoveryh
how did the UK use monetary policy in the 2008 Financial Crisis
Bank Rates were cut from 5.75% to 0.5%
several rounds of QE took place, putting more money in the money supply
