4.5.4 Macroeconomic policies in a global context Flashcards
What are the 4 types of policies the Government use
Fiscal Policies
Monetary Policies
Supply-side policy
Exchange rate policies
What are direct controls
any measure of government intervention which is directly aimed at increasing or decreasing some particular group of payments or receipts in the balance of payment
Direct controls include minimum or maximum prices/wages, quotas on imports, limits on currency or regulation e.g. maximum interest rates
What are the 4 way the Government can reduce fiscal and national debts
Austerity
Demand stimulus (Expansionary fiscal + monetary policy)
Automatic stabilisers
Default on loans
How have the UK Government since 2010 tried to decrease the national debt
Why is it an unfavourable thing to do
What could free-market economists suggest to do instead
Austerity - attempt to decrease Government spending and increase taxes
could limit growth, and reduce living standards and income equality
cutting out waste - i.e become more efficient - however, would these savings be enough to make a difference
How could demand stimulus reduce fiscal + national debts
by high spending - causing economic growth
bringing high tax revenues
more positive fiscal debt and may work in the long run to reduce national debts
How could you rely on automatic stabilisers to reduce fiscal + nation debts
allow the economy to grow so national debt/fiscal deficit will reduce as a percentage of GDP
Approach the US took after the 2008 financial crash - their economy recovered fairly quickly
Defaulting on loans to reduce fiscal + national debt
failure to meet the legal obligations to pay the loan - no more payments
economic cost of this is so large that governments only default if it is the only option. Russia and Argentina have defaulted on their debts in the past
What are the ways the Government can reduce poverty and inequality
Redistribution of income using a progressive tax system - taxation in fiscal policy
Gov welfare spending - fiscal
Improving incentives to work - supply side policies
How can a progressive tax system reduce poverty and inequalities
What is the problem with this idea
Redistribution of income from rich to poor (inheritance is most progressive)
However Laffer curve can show unintended consequences
Not always effective as America has a progressive tax system but has high income inequalities
How can Government welfare spending reduce poverty and inequalities
What is the problem with this
Means tested benefits - targeted at people who need the most help and provide a safety net/minimum standard of living and can improve inequalities
However, can reduce in incentives to work
How can the Government providing goods/services help reduce poverty and ineqalities
Give citizens equal opportunities and access to services they otherwise may not be able to afford
Can give children an equal start in life like education and health care
Not the same in every country
How can the Government reduce wage differentials to help reduce poverty and inequalities
Minimum wage can help improve income of the poor
Maximum wage prevent unproportionate executive pay
Antidiscrimination laws
Trade Union friendly legislation
How can the Government improve access to education and training opportunities help reduce poverty and inequalities
Will prevent children from poorer backgrounds achieving less - causing a reduction in earning potential
Like pupil premium schemes, easier access to unis
Help prevent structural unemployment
How can price control on essentials (max price) by the Government to reduce poverty and inequalities
What is the problem with this
housing, bus fares, food items
Increase spending power of the poor and in turn real incomes
However: can cause excess supply and possible back markets
How may free market economist argue against Government intervention for Poverty and Inequalities
Trickle down concept
Increasing the income of the rich will lead to an increase in income of the poor
E.g. rich can increase amount of jobs
Higher inequality can be an incentive to work
Which are the ways the Government can intervene to change interest rates and supply of money
Monetary policy
quantitative easing
How can the Central bank control interest rates and money supply
May do this for domestic reason to control inflation, exchange rate issues or changes in world commodity prices
They can change the base rate, which will affect the liquidity of commercial banks
Why is it argued that the central bank don’t have complete control of the money supply
they cannot control the ability of the financial system to create credit
Globalisation of financial market makes it more difficult to control money supply
Central banks should manage demand side inflation but not supply side
How may the banks use QE to control money supply, and demand in the economy
QE is used when there is a liquidity trap (base rate is too low already)
It decrease interest rates on assets, causing these assets to be sold and liquidity to increase in financial sector
Increasing demand in the economy
What polices may the Government might use to increase international competitiveness
Supply side policies
Exchange rate policies - monetary policies
Join WTO or trade agreement
How may supply side policies allow an increase in international competitiveness
Improve productivity
Improve flexibility for businesses through deregulation and reduced taxation
Tax incentives
Education to improve skills of labour force
How can the central banks use exchange rates to improve international competitveness
How can the BoE do this
Weakening the currency
E.g. through decreasing the interest rates will reduce hot flows and hence demand for the currency
Therefore exports will become more competitive
How can the Government use policies combat external shocks
Globalisation makes world economies interdependent
E.g. shock in commodities like oil - like a price rise
Expansionary monetary/fiscal can be use to reduce impact on price levels
Recessions like financial crashes may use demand stimulus
What are the benefits of transnational companies
creation of jobs, tax revenue, knowledge and investment
What are the drawbacks to transnational companies
Destroying local culture, affecting the environment, withdrawing more profit than investment, influencing politicians
How do developing nations prevent TNS from exploiting their country for profits
Setting up a joint company with a local partner - some profits are retained within the country and knowledge/technology is tranferred
What is transfer pricing
A ways firms engage in tax avoidance
Occur if a good is produced in one country and transferred to another country to make it into something else and the is sold
To avoid tax, a firm can set a lower price on the product made in the first country and then artificially increase the price in the second country
Why is it so difficult for individual governments to control TNC
Solutions require worldwide agreements - but one solution cannot benefit one country more than it does another
Also division within countries around policies with TNC
Why is inaccurate information cause problems for policy makers
Short-term information like GDP figures for the previous month are often inaccurate so the Government is unable to see problems clearly
Knowledge about how much tax evasion/avoidance in an economy and how to prevent it
BoE makes decision on past information which may not reflect the current climate
Cost-benefit analysis can be time consuming/cost and impractical
How can risks and uncertainties cause problems for policy makers
Government can not accurately predict the future - which policy is most beneficial
Full impact + unintended consequences from their policies
How can external shocks be a problem for policy makers
Government is unable to control + prepare for these - best outcome is to lessen their impact
All situations are different
Unintended consquences
