4.5.4: Macroeconomic Policies In A Global Context Flashcards
What are measures that reduce fiscal deficits & national debts?
-Austerity: reduce public expenditure.
-Increase taxes.
-Austerity measures might backfire if fall in AD reduces output (unemployment increases, tax revenue falls).
What are measures that reduce poverty & inequality?
-Progressive taxation.
-Inheritance taxation.
-Improve quality of education and training in state schools.
-Support for children of low income families (free school meals).
What is the impact of lowering interest rates?
-Reduces cost of borrowing, encouraging consumption and investment (AD increases, LRAS may increase if investment is effective).
-Reduce cost of mortgage payments, enabling more disposable income for consumption (AD increases).
-Contains inflation while maintaining economic stability.
Why may lowering interest rates not boost economic growth?
-Banks have poor liquidity (therefore, unwilling to lend).
-Low confidence: consumers & firms are unwilling to take the risk of borrowing & investment.
-Time lags: takes up to 2 years to have an effect (e.g. people on
fixed rate mortgages don’t notice straightaway).
What is the impact of increasing the supply of money?
QE increases the supply of money.
-Increase the inflation rate to avoid deflation.
-Increase in bank lending & economic growth.
What are measures to increase international competitiveness?
-Tight fiscal policy to reduce inflationary pressures.
-Privatisaiton.
-Deregulation (e.g. the UK government has established the ‘Red Tape Challenge’ to simplify regulation for firms).
-Competitive devaluation (e.g. China devalues their currency in order to reduce export prices).
-Join the WTO or sign trade agreements.
What are problems with competitive devaluation?
-Rising value of debt in real terms, less disposable income, less AD.
-Falling prices deter people from consumption.
-Falling prices causes rise in wages in real terms, causing real wage unemployment.
What are examples of use of macroeconomic policies to respond to external shocks?
-Expansionary policy to reduce the impact of a fall in GDP.
-Deflationary policy to reduce the impact on inflation.
How can TNCs negatively impact the economy?
-Destroying local culture.
-Affecting the environment.
-Withdrawing more in profits than they inject through investment.
What measures are used to control TNC operations?
-Regulation of transfer pricing.
-Limits to government ability to control global companies.
How does regulation of transfer pricing help to control TNC operations?
In the UK, companies which do not allocate sufficient profits to the UK, in accordance to rules, are challenged by HMRC.
How does limits to government ability to control global companies help to control TNC operations?
The tax rules are complex and difficult to apply and regulate. There could be costs to HMRC to challenge firms which do not declare their profits truthfully (although HMRC managed to secure £4.1 billion in tax revenue for the UK Exchequer).
What are problems facing policymakers when applying policies?
-Inaccurate information.
-Risks & uncertainties.
-Inability to control external shocks.
How does inaccurate information impact policy making?
Some policies might be decided without perfect information.
How does risks & uncertainties impact policy making?
Law Of Unintended Consequences: policies can be undermined, which could make government policies expensive to implement, since it is harder to achieve their original goals.
