5. GOVERNMENT MACROECONOMY INTERVENTION Flashcards
Macroeconomic objectives
Price stability
Low unemployment
Economic growth
Government budget
Financial plan outlining revenues (taxes) & expenditure over a period
Budget deficit
When spending > revenue
Budget surplus
When revenue > spending
National debt
Cumulative amount of gov borrowing over time
Direct tax
Paid directly to gov
Income tax, corporation tax
Indirect tax
tax on goods/services rather than on income/profits
Progressive tax
Higher income -> higher tax percentage
Regressive tax
Lower income -> higher tax burden
Marginal rate
Tax on the next unit of income
Government spending reasons
Provide public goods
Reduce inequality
Stabilise economy
Expansionary fiscal policy
Increase spending
Cut taxes
to boost AD
Used during recessions
Contractionary fiscal policy
Decrease spending/ raise taxes
to reduce AD
Used during inflation
Impact of expansionary/ contractionary fiscal policies on AD/AS
Expansionary- AD shifts right, higher output, higher price levels
Contractionary- Ad shifts left, lower output, lower price levels
Monetary policy
Use of interest rates, money supply, and credit regulations to influence AD
Tools for monetary policy
Interest rates- higher rates discourage borrowing & spending, lower rates reduce & increase consumption, increase AD
Money supply- increase money supply boosts spending, reducing slows inflation
Expansionary/ contractionary monetary policy
Expansionary- lower interest rates, increase money supply -> boosts AD
Contractionary- high interest reates, reduced money supply -> inflation
Impact of expansionary monetary policy on AD/AS
Expansionary- AD shifts right, higher output & price levels
Contractionary- AD shifts left, lower output, price levels
Supply-side policy
Policies aimed at increasing the economy’s productive capacity and LRAS
Objectives of supply-side policy
Boost productivity
Encourage innovation
Improve efficiency
Tools for supply-side policy
Education/Training: Enhances workforce skills.
Infrastructure development: Improves efficiency (e.g., roads, telecom)
Technology support: Encourages innovation.
Labor market reforms: Reduces barriers (e.g., flexible working hours
Supply-side policy impact on AD/AS
LRAS shifts right -> higher output, lower price levels, improved employment
Terms of trade
Measure of the relative prices of a country’s exports compared to its imports
Calculation of ToT
Index of export prices/ index of import prices x 100
When does ToT improve
improves when export prices rise relative to import prices
a country can buy more imports for the same amount of exports
When does ToT deteriorate
deteriorates when import prices rise relative to export prices
a country needs to export more to buy the same quantity of imports
Factors influencing ToT
