9: Examples of Global Policy

Question 1

Changes in interest rates and the supply of money (fishers theory)

Answer 1

Fishers theory = M(moneysupply)V(velocity) = P(price level)T(transaction)

Question 2

Interest rates and Quantative easing for following countries:
UK
Eurozone
US
China
Japan

Answer 2

5.25% £895bn
4.5% Euro 900bn
5.5% $8.5tn
3.45%
- 0.10 % 32-35tn yen

Question 3

ADVANTAGES of quantative easing

Answer 3

Increase to inflation target
Increase AD
Positive wealth effect
Policy to use when IR can’t get any lower

Question 4

DISADVANTAGES of quantative easing

Answer 4

Weakens currency
Time lag
Cost -> countered by quantative easing tightning
Increase wealth inequality

Question 5

Measures to increase international comeptitiveness

Answer 5

Cut corporation tax, lower labour costs (China, India and Bangledesh)

Question 6

Measures to reduce fiscal deficits and national debts

Answer 6

Reducing budget deficits could lead to lower economci growth -> causes govt. finances to worsen to worsen as tax revenues fall
Taxes too high -> less incentive to work
Economic growth help reduce a deficit -> increases revenue from taxes without rasing taxes
Consumers spend more -> more VAT (not effective if structural deficit)

Question 7

Measures to reduce poverty and inequality

Answer 7

Income redistribution through govt. intervention i.e. inheritance tax stops rich families keeping all wealth
Progressive taxes i.e. higher rates of income taxes for top earners (could decrease incentive to work harder -> fall in revenue)
UK national min wage

Question 8

Use of changes of interest rates and the supply of money

Answer 8

MP used to stimulate economy and raise govt revenue
UK, US and EU govts. use low IR to encourage spending and investment -> boosts economic growth
QE -> used when inflation low and IR can’t go down any further -> increases cash flow, encourages spending and investment -> may have inflationary pressure

Question 9

Transfer pricing

Answer 9

Corporations shift profits out of the countries they operate in and into tax havens

Question 10

Limits to government ability to control global countries

Answer 10

Tax rules complex and difficult to apply and regulate
May be costs for HMRC to challenge firms which do not declare their profits truthfully
HMRC secured £4.1bn in tax rev -> may have taken a long time
Growing power of TNC’s and their contribution to economic growth can mean the ability to control them and their actions become harder

Question 11

Problems facing policy makers

Answer 11

• Inaccurate info - policies may be decided without perfect info and may require a full cost benefit analysis which takes time and is expensive
• Risk and uncertainty - consumers react in unexpected ways, uncertainty in how businesses will behave
  Inability to control external shocks - i.e. financial crisi + COVID