2.6.1-2.6.2 Flashcards
1
Q
What are governments economic growth objective?
A
- In UK EG is 2.5 % and aim to have sustainable growth for the long run. Some countries aim to develop development before economic growth which improves living standards and life expectancy.
2
Q
Explain aims for low unemployment?
A
- Aim to have everyone full employment as possible. They aim for 3% unemployment. Labour force should also be employed
3
Q
Explain aims for low and stable inflation?
A
- Gov target is 2% measured by CPI. Aims to provide price stability for firms and consumers will help make decisions in long run. If inflation falls 1% out of target chancellor will write a letter on why this has happened and what the bank intends to do about it.
4
Q
Explain aims for balance of payment equilibrium and current account?
A
- This is important to allow country to sustainably finance the current account which is important for long term growth.
5
Q
Explain balance government budget aims?
A
- Makes sure government keeps control of borrowing. So national debt does not escalate. Allows them to borrow cheaply in future and make repayments easier.
6
Q
Explain protection of the environment aims?
A
- Provide long term environmental sustainability. Ensures resources used are not exploited such as oil and natural gas and so they are used sustainably.
7
Q
Explain greater income quality aims?
A
- Minimises gap between rich and poor and is generally associated with a fairer society.
8
Q
What must the government do to aim macroeconomic objectives?
A
- Should manage demand through monetary and fiscal policy. Increase AD to increase demand and economic growth whilst in a boom. They will decrease AD in inflationary pressures.
9
Q
What are demand side policies?
A
- Designed to manipulate consumer demand.
10
Q
What are Expansionary policies?
A
Aimed at increasing AD to bring growth,
11
Q
What is deflationary policy?
A
Decrease AD to control inflation
12
Q
What is a monetary policy?
A
- Central bank or authority attempts to control level of AD by altering base interest rates or amount of money in economy.
13
Q
What is the fiscal policy?
A
- The use of borrowing, government spending and taxation to manipulate level of AD and improve macroeconomic performance.
14
Q
Explain monetary policy interest rates?
A
- The interest rate is the cost of borrowing money.
- The MPC (Monetary Policy Committee) sets the official base rate to control inflation.
- The repo rate is what the Bank of England charges banks for short-term loans.
- Banks adjust their own interest rates based on the repo rate.
- The Bank of England acts as the lender of last resort when banks need money.
15
Q
What will an increase in interest rates cause?
A
- Increase the cost of borrowing. Lead to fall in investment and consumption reducing AD. Higher interest rates cause high ROI also makes saving more attractive.
- Since less people are borrowing and more are saving fall in demand for stock and shares. Lead to a fall in prices for these. Moreover investment is less attractive since firms see less profits
16
Q
What else will an increase in interest rates cause?
A
- People will be less confident about borrowing and spending. Fall in consumer and business confidence leads to fall in consumption and investment causing a fall in AD. Mortgages will become more expensive so people pay more of their debts paying it back. So consumption will fall as they are buying less things.
- Higher rates will cause more foreigners to hold their money in British banks as they will see a higher return. Increased demand for pound and pound will rise. Imports will be cheaper and exports will be expensive.
17
Q
What are the problems with the method of demand management?
A
- Exchange rate may be affected the exports fall significantly and imports rise significantly causing a balance of trade deficit
- Changes in interest rates take up to 2 years to have full affect
- Sometime interest rates are low and can’t be decreased further to stimulate demand.
- High interest rates will discourage investment
18
Q
What is Quantitative easing?
A
- When BOFE buys assets in exchange for money in order to increase money supply and move money during low demand.
19
Q
What are ways of buying assets in the bank of england?
A
- Increase size of banks accounts called the reserves which encourages them to lend money.
- People found out that banks preffered to keep their money in reserves rather than lending it out.
- As a result banks bought bonds from private companies such as insurance companies
20
Q
How does quantitative easing have the effect of increase consumption?
A
- Bank is buying assets which causes a rise in demand and so asset price rises. Causes a positive wealth effect since shares and houses are worth more so people increase consumption. The cost of borrowing will decrease making it cheaper for households to finance spending
- Money supply increases . Private sectors receive more which they can spend on goods and services which increases consumption.
- Commercial banks lower interest rates as they are receiving a lot of miney from BOFE so can vary low interest rates to customers.
21
Q
What are the problems with quantitative easing?
A
- Very risky and not controlled properly, could cause inflation and hyperinflation
- Only lead to increased demand for second hand goods which pushes up price but not AD.
- No guarantee that higher asset prices lead to higher consumption through wealth effect
22
Q
What is the role of the bank of england?
A
- Monetary policy is controlled by the bank of England rather than the government. The MPC makes the most of important decisions.
- Their main aim is to keep inflation at 2% and if it goes to 1 or 3% the chancellor has to write a letter to Bank of england on what had happened.
- Since 2009 MPC has kept bank at 0.5% and policy has focused on boosting economic growth
23
Q
What are the ways the government can increase AD through Fiscal policy?
A
- Rise in income ax will cause a fall in disposable income. Lead to a reduction in consumption. A rise in cooperation tax will decrease a firms profit and lead to a reduction in investment
- A rise in government spending will increase AD
24
Q
What are direct taxes and indirect taxes?
A
- Dir = payed by individual to taxpayer
- Ind = When person charged with paying money is able to pass the cost to someone else
- Highest taxes are: Income tax,national insurance,VAT and cooperation tax.
25
Q
What is income tax?
A
- Indirect tax and is biggest source of revenue for the government and 25% of all taxation. It is payed as a percentage of your income
26
Q
What is VAT?
A
- Indirect tax and standard rate is 20%. Not all goods pay the standard rate
27
Q
What are the problems which need to be considered when evaluating the fiscal policy?
A
- Government spending affects LRAS. By cutting government spending to reduce AD the government may reduce quality of education or research on tech
- Impact of fiscal policy is determined by the multiplier, bigger the multiplier bigger the impact on AD.
- Taxes and spending have an impact on inequality, so some decisions aimed to reduce/increase income inequality.
28
Q
What are some issues on demand side policies?
A
- Classical economists argue that fiscal or monetary will have no effect on long run output so supply side policies should be used. An increasing AD will have no effect that increase prices
- On keynsian the impact of changes in AD depend on where economy is operating.
29
Q
What is Monetary policy and benifits?
A
- Useful as government is able to increase demand without increasing spending Which results in larger fiscal deficits.
30
Q
What is Fiscal policy and benefits?
A
- Can have significant impacts on supply side of policies of economy, E.g increase in spending on educations to increase AD will increase LRAS.Moreover good to target specific groups to reduce poverty for example increasing benefits can increase AD and inequality.
31
Q
What is the great depression?
A
- In 1930 world experienced severe depression. Unemployment was over 15% and in the US it was 25%. The most effected was the primary industry and the manufacturing industry which relied on exports and so it was impacted by world trade.
32
Q
What are the causes of the great depresssion?
A
- The loss of consumer and business confidence: Shareholders lost money in the crash and other worried what would happen.
- Also by US banking system. Banks had lent too much during 1920s and created an unsustainable boom. Government allowed banks to fails which decreased confidence further
- Protectionism is another cause. Reduced world trade. Firms involved in exports were no longer able to pay bank loans.
- UK also affected by commitments to the gold standard where the currency was fixed to the value of gold and therefore fixed to other currencies. pound was appreciated more rapidly and exports fell
33
Q
What are the policy responses in the Uk?
A
- Both government were forced to nationalise banks and building societies and guarantee savers their money to prevent chaos of collapsed banks.
- They used expansionary monetary policies with low interest rates and QE. BOFE said QE led to lower unemployment
34
Q
What are the policy responses in the USA?
A
- USA had a more expansionary fiscal policy and this is why it recovered quicker. In 2010 UK prioritised reducing national debt but USA done this in 2013.
35
Q
A
