2E Flashcards
What are fiscal policies
Use of government spending and taxation to control the macroeconomy and achieve the key macroeconomic objectives. It is a demand-side policy tool- primarily affecting AD
What is the government budget
A publication setting out the governments plans to support economic growth through significant investment, skills and innovation.
What is a budget surplus
G<T
What is a budget deficit
G>T
What do expansionary policies achieve
Increase AD
What do contractionary polices achieve
Decrease AD
What are progressive taxes
Tax rises as income rises. e.g income tax
What are regressive taxes
Tax rate decreases as income rises e.g tobacco and alcohol.
It depends on factors for for fiscal policies
-It depends on whether changes have the assumed affect (e.g Do income tax cuts always increase consumption)
-It depends on the size of the output gap
-It depends on the size of the multiplier
-Some views of G are difficult to reduce e.g Health
-Some factors are outside the government’s control. e.g the ageing population places a greater burden on the health service.
What are monetary policies
The use of interest rates, exchange rates and money supply to control the macro-economy and achieve the macro objectives.
What are interest rates
IS the cost of borrowing money or the reward from saving money. IR has become a key policy instrument to manipulate the economy.
How does decreased exports affect AD
AD decreases
How does increased exports affect AD
AD increases
How does the MPC work
8 members meet plus the governor of the bank of England.
Primary aim is to control inflation.
Second aim is to support government economic policy and targets for growth and employment
Factors to consider when setting IR
State of demand- is demand too strong
Housing market
Labour market
Inflation from overs3eas
trends in exchange rate
Effectiveness of IR
Time lags- impact in SR or LR
Size of cut- really going to increase borrowing ?
Consumer confidence
-Has a positive relationship with exchange rates.
What is quantitative easing
-Central banks creates money to buy bonds from financial institutions
-leading businesses and people to borrow more
-reducing IR
-So they spend more and create jobs
-boosts economy.
Effectiveness of QE
IF banks actually lend out extra money
If consumer actually borrow or not CC
If AD rises too much, demand pull inflation
What are supply side policies
Any government policy designed to increase LRAS and improve an economy’s productive potential.
Examples of SSP
Reforms to employment laws-Designed to improve workplace flexibility and productivity
Increased investment in education, e.g subsidies
reforms to tax and benefit system- reforms to income tax, welfare benefits, creating incentive to work.
Product market reforms
Privatisation
Deregulation-more competition
Policies to increase FDI
Effectiveness of SSP
-Timescale
-Size of output gap
-Guarantee of effectiveness.
