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✅ Y1 Economics Macro > 3.2.4 Macroeconomic Policy > Flashcards

3.2.4 Macroeconomic Policy Flashcards

1
Q

What are the 3 macroeconomic policies?

A
  1. Monetary policy (SRAS, demand side shifts AD)
    - interest rates
    - quantitative easing
  2. Fiscal policy (SRAS, demand side shifts AD)
  3. Supply side (shifts LRAS)
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2
Q

Define fiscal policy

A

Use of taxation, public spending, governments budgetary position to achieve the government policy objectives

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3
Q

What differentiates a budget surplus, deficit and balanced budget?

A

Budget surplus: Gov spending < tax

Balanced budget: “ = “

Budget deficit: “ > “

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4
Q

What are the 5 types of taxes?

A
  1. Direct taxation:
    taxied levied on incomes and wealth
    I.e income tax. Not possible to shift onto someone else
  2. Progressive taxation:
    As income rises, a larger proportion of income is paid in tax
    I.e corporation tax
  3. Indirect tax:
    Tax levied on spending. It’s possible to be shifted onto someone else
    I.e VAT
  4. Regressive tax:
    When proportion of income paid in tax falls as income increases
    I.e alcohol duties
  5. Proportional tax:
    When proportion of income paid in tax stays the same as income increases
    I.e VAT
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5
Q

What characteristics does a good tax have?

A
  • equitable
  • economical
  • flexible
  • convenient
  • efficient
  • certain
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6
Q

What is inheritance tax?

A

Paid if a persons estate (property, possessions) is worth more than £325,000 when they die

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7
Q

Define public sector borrowing

A

Borrowing by the government revenue in a particular time period, usually a year
— if there is a budget deficit, there is a positive borrowing requirement

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8
Q

Define deficit financing

A

Deliberately running a budget deficit and borrowing to finance the deficit

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9
Q

Name the 3 types of cyclical and structural budget deficits

A
  1. Cyclical budget deficit
    Rises in downswings, falls in upswings
  2. Cyclical budget surplus
    Could arise during an upswing of an economic cycle if the structural deficit is 0
  3. Structural budget deficit
    Isn’t affected by economic cycle but results from structural change in economy
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10
Q

What does the effectiveness of fiscal policies depend on?

A
  • size of cut in tax or rise in Gov spending
  • size of multiplier
  • initial equilibrium
  • short-run / long-run
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11
Q

Advantages and disadvantages of fiscal policies?

A

Advantages:

  • stabilises an economy by offsetting cyclical functions
  • G stimulates economic growth and employment
  • tax generates revenue and can provide public goods
  • effective if Gov spending multiplier is large

Disadvantages:

  • decision may be based off of poor information
  • g can result in budget deficit
  • time lags
  • crowding out
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12
Q

What is crowding out?

A

Situation where an increase in Gov or public sector spending displaces private sector spending with little or no increase in AD

If the economy is on the PPF, it’s impossible to simultaneously employ resources in private and public sector

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13
Q

Define short-run

A

Time period when at least one FOP is in fixed supply I.e capital

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14
Q

Define long-run

A

Time period when all FOP are variable and reach their productive potential

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15
Q

What is monetary policy?

A

Involves central bank taking action to influence the manipulation of interest rates, supply of money, credit and exchange rates

Central bank controls banking system on behalf of UK Gov

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16
Q

What is the MPC?

A

Monetary Policy Committee:
Consists of 9 economists who meet monthly to set the bank rate and decide what other elements of monetary policy need changing

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17
Q

Define bank rate

A

Rate of interest the BofE pays to commercial banks on their deposits held at the BofE

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18
Q

Objective of the MPC?

A

Control inflation and keep it +/- 1% of the 2% target

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19
Q

What components are in each of the 3 stages of the transmission mechanism?

A

Stage 1

Official rate

Market rates
Asset prices
Expectations / confidence
Exchange rates

Stage 2:

Domestic demand
External demand

Total demand

Stage 3:

Domestic inflationary pressure
Import prices

Inflation

20
Q

Acronym for £’s exchange rate value?

A 
S trong
P ound
I mports
C heap
E xports
D ear
21
Q

Advantages and disadvantages of the monetary policy?

A

Advantages:

  • effective at increasing / decreasing inflation
  • quick to take a effect
  • flexible
  • not politically motivated
  • cheap

Disadvantages:

  • time lag can take up to 2 years
  • liquidity trap: ineffective during recession
  • difficult to control many objectives with one tool
22
Q

Define bonds

A

Financial securities sold by companies (corporate bonds) or the government (Gov bonds) which are a form of long-term borrowing

Have a maturity date, with borrower typically making fixed interest payments each year until the bond matures

Price ^ , Yield v

23
Q

What is an expansionary monetary policy?

A

Involves central bank decreasing interest rates in order to increase AD and shift it rightwards

A depreciation in exchange rate is still expansionary monetary policy

24
Q

What is a contractionary monetary policy?

A

Involves the central bank raising interest rates in order to decrease AD and shift it leftwards

An appreciation in exchange rates is also contractionary monetary policy

25
Q

What is quantitative easing?

A

Employed during recession

The central bank buys existing corporate and government bonds held by private businesses i.e pension fund holders, insurance companies
Which is done through an injection of electronic money

Improves their liquidity

Price of existing assets rise, yield decreases

BofE BUYS BONDS, MONEY SUPPLY INCREASES

26
Q

How does quantitative easing affect the real economy?

A
  • bank lending flows again — increased household and corporate spending
  • confidence rises
  • AD increased and economy grows
  • inflation target is achieved
27
Q

What are some key supply-side challenges for the UK economy?

A
  • persistent productivity gap
  • high youth unemployment
  • rise of emerging nations
  • deep regional economic divide
  • riding inequality/ relative poverty
28
Q

Name 4 industrial policy measures

A
  1. Privatisation
    Selling of assets
  2. Marketisation
    Shifting provision of goods and services from non-market to market sector
  3. Deregulation
    Removal of regulation to promote competition
  4. internal markets
    Taxpayer finances public sector
29
Q

Name 5 labour market measures (supply side policies)

A
  1. Tax cuts
    Lowering income taxes / raising
  2. Welfare reduction
    Lower welfare payments or making welfare harder to claim
  3. Trade union reform
    Removing TU legal protection
  4. Flexible pension arrangements
    Encouraging workers to ‘opt out’ of staff pensions and organise private ones
  5. Improving education and training
30
Q

Name 4 financial and capital market measures

A
  1. Deregulating financial markets
    Increasing competition among banks
  2. Encouraging saving
    Tax privileges for saving
  3. Promoting entrepreneurship
    Grants, tax breaks etc
  4. Reducing public spending and public sector borrowing
    Avoid crowding ojr
31
Q

What are supply side fiscal policies?

A

Aim to increase economies ability to produce and supply goods, via creating incentives to work, save, invest and be entrepreneurial.
Shifts LRAS rightwards — aims to improve the long run productive potential of the economy

32
Q

Define supply side economics

A

Branch of free market economics arguing Gov policy should be used to improve competitiveness and efficiency of markets

Offers originate in private sector

Every macro objective can be achieved through supply side policy

33
Q

What 4 economic indicators do the MPC consider when making decisions?

A
  1. Domestic monetary developments
  2. Exchange rate statistics
  3. Demand and output policies
  4. Labour market signals
34
Q

How do changes in the exchange rate affect AD and various macro policy objectives

A

SPICED:
strong pound imports cheap exports dear

Life becomes easier for British retailers as resources become cheaper, however exported goods / services become dearer for foreign consumers which hits britains BOP

WPIDEC:
weak pound imports dear exports cheap

Exports become cheap meaning they will rise in AD and cause subsequent economic growth (if demand is elastic)
— inelastic will fall as import price will rise which would cause a larger withdrawal from the circular flow of income

35
Q

What are 3 objectives of monetary policy?

A
  1. Inflation — 2% target
  2. Unemployment — below 3%
  3. Currency exchange rates — increasing money supply by issuing more currency etc. which makes domestic currency cheaper than foreign counterparts
36
Q

How can expansionary fiscal policy influence AD?

A

Expansionary fiscal policy gets put in place in response to recessions or employment shocks.
Government spending is increased in areas such as infrastructure, education and unemployment benefits

37
Q

How can contractionary fiscal policy influence AD?

A

Contractionary fiscal policy can be used to reduce government spending and sovereign debt or to correct out-of-control growth fuelled by rapid inflation and asset bubbles during booms which decreases AD

38
Q

How can fiscal policy influence aggregate supply (short run)?

A

Short run:

  • changes in VAT
    affects supply costs of businesses
  • changes in environmental taxes
    Rise is carbon tax will increase the costs especially of energy-intensive firms
  • Changes in import tariffs
    Lower tariffs as a result of trade liberalisation will lead — ceteris paribus — to lower costs
  • changes in Gov subsidies
    Input subsidies paid to producers lower their costs
39
Q

How can fiscal policy influence aggregate supply (long run)?

A

Long run:

  • state funding in research and development can affect the dynamic efficiency in markets
  • higher gov spending on education and training can increase human capital / productivity for long term growth
  • changes in corporation tax and import tariffs can influence FDI
40
Q

How can Gov spending and taxation affect the pattern of economic activity?

A

Gov spending:
Subsidising businesses to fund capital projects, improve public services etc, works as a large component of AD - stimulates growth
- reduces inequality
- improves infrastructure

Taxation:
Promotes ‘wanted’ and beneficial behaviour, whilst constraining ‘unwanted’ harmful behaviour
- raises revenue
- adjusts level of AD
- alters pattern of spending towards merit goods
- redistributes income
- controls imports

41
Q

Define a balanced budget

A

Total expected = Total planned

Revenue Spending

42
Q

Define a national debt

A

Total outstanding borrowings of a central government

43
Q

What is supply side improvement, and why does it differ from supply side policy?

A

Supply side improvement occurs when the actions taken by firms are made in self interest i.e increasing staff training or tech which will improve productivity.

Other firms may adopt the same principles to gain a competitive advantage, therefore improving that industry

Whereas policy is applied for all firms by the Gov

44
Q

What are the 2 types of supply side policies?

A
  1. Interventionist:

Involve Gov intervention to overcome market failure i.e higher Gov spending on transport

  1. Free market:

Involve policies to increase competitiveness and free-market efficiency i.e privatisation

45
Q

How can tax changes be designed to appeal to personal incentives?

A

The tax system can stimulate factor output, rather than alter demand:

Reducing tax rates, including income and corporation tax will act as an incentive for

  • unemployed workers to join the labour market.
  • Existing workers will work harder
  • Encourages startups

This would increase potential output in the economy

46
Q

How can supply side policies affect unemployment?

A

Decreasing unemployment:

  • funding apprenticeships / paid internships
  • reductions in rate of national insurance contributions
47
Q

How can supply side policies affect the exchange rate in the uk?

A
  • Depreciation in the exchange rate (helps exporters)
  • low interest rates + improving credit supply to businesses

✅ Y1 Economics Macro (4 decks)

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