4.5.4 Macroeconomic policies in a global context Flashcards

1
Q

What are the 4 types of policies the Government use

A

Fiscal Policies

Monetary Policies

Supply-side policy

Exchange rate policies

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2
Q

What are direct controls

A

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

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3
Q

What are the 4 way the Government can reduce fiscal and national debts

A

Austerity

Demand stimulus (Expansionary fiscal + monetary policy)

Automatic stabilisers

Default on loans

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4
Q

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

A

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

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5
Q

How could demand stimulus reduce fiscal + national debts

A

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

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6
Q

How could you rely on automatic stabilisers to reduce fiscal + nation debts

A

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

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7
Q

Defaulting on loans to reduce fiscal + national debt

A

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

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8
Q

What are the ways the Government can reduce poverty and inequality

A

Redistribution of income using a progressive tax system - taxation in fiscal policy

Gov welfare spending - fiscal

Improving incentives to work - supply side policies

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9
Q

How can a progressive tax system reduce poverty and inequalities

What is the problem with this idea

A

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

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10
Q

How can Government welfare spending reduce poverty and inequalities

What is the problem with this

A

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

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11
Q

How can the Government providing goods/services help reduce poverty and ineqalities

A

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

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12
Q

How can the Government reduce wage differentials to help reduce poverty and inequalities

A

Minimum wage can help improve income of the poor

Maximum wage prevent unproportionate executive pay

Antidiscrimination laws

Trade Union friendly legislation

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13
Q

How can the Government improve access to education and training opportunities help reduce poverty and inequalities

A

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

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14
Q

How can price control on essentials (max price) by the Government to reduce poverty and inequalities

What is the problem with this

A

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

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15
Q

How may free market economist argue against Government intervention for Poverty and Inequalities

A

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

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16
Q

Which are the ways the Government can intervene to change interest rates and supply of money

A

Monetary policy

quantitative easing

17
Q

How can the Central bank control interest rates and money supply

A

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

18
Q

Why is it argued that the central bank don’t have complete control of the money supply

A

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

19
Q

How may the banks use QE to control money supply, and demand in the economy

A

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

20
Q

What polices may the Government might use to increase international competitiveness

A

Supply side policies

Exchange rate policies - monetary policies

Join WTO or trade agreement

21
Q

How may supply side policies allow an increase in international competitiveness

A

Improve productivity

Improve flexibility for businesses through deregulation and reduced taxation

Tax incentives

Education to improve skills of labour force

22
Q

How can the central banks use exchange rates to improve international competitveness

How can the BoE do this

A

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

23
Q

How can the Government use policies combat external shocks

A

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

24
Q

What are the benefits of transnational companies

A

creation of jobs, tax revenue, knowledge and investment

25
Q

What are the drawbacks to transnational companies

A

Destroying local culture, affecting the environment, withdrawing more profit than investment, influencing politicians

26
Q

How do developing nations prevent TNS from exploiting their country for profits

A

Setting up a joint company with a local partner - some profits are retained within the country and knowledge/technology is tranferred

27
Q

What is transfer pricing

A

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

28
Q

Why is it so difficult for individual governments to control TNC

A

Solutions require worldwide agreements - but one solution cannot benefit one country more than it does another

Also division within countries around policies with TNC

29
Q

Why is inaccurate information cause problems for policy makers

A

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

30
Q

How can risks and uncertainties cause problems for policy makers

A

Government can not accurately predict the future - which policy is most beneficial

Full impact + unintended consequences from their policies

31
Q

How can external shocks be a problem for policy makers

A

Government is unable to control + prepare for these - best outcome is to lessen their impact

All situations are different

Unintended consquences