Chapter 10 - Macroeconomic Polices of Governments and Conflicts.

Question 1

What are the two types of mean-side policies and what translation of the AD curve results?

Answer 1

Fiscal and monetary policy are the methods used by the government to achieve macroeconomic objectives.
An increase in AD cause a rightward shift in the AD curve.

Question 2

What dictates the impact of fiscal and monetary policy?

Answer 2

The shape of the AS curve and the multiplier effect.

Question 3

Summarise monetary policy.

Answer 3

The MPC’s method of manipulating monetary variables with the aim of achieving macroeconomic objectives. Changes in interest rates or quantitative easing.
Changes have multiplier effects.
Main aim is to achieve the governments inflation target of 2% +- 1%.

Question 4

Summarise the MPC.

Answer 4

The government, through the Chancellor of the Exchequer, delegates responsibility of monetary policy to the MPC.
Made of 9 members, 5 work for the Bank of England (including the governor), 2 are industrialists, 2 academic economists.
They meet at least once a month on the first Wednesday or Thursday.
They take into account anything affecting inflation and make a decision about interest rates.
Changes in interest rates tend to be only .25% to allow the economy to react.

Question 5

What are hawks?

Answer 5

Members of the MPC who tend to want to raise interest or decrease them more slowly..

Question 6

What are Doves?

Answer 6

Members of the MPC who are less likely to raise interest rates and are less likely to change interest rates than Hawks.

Question 7

What is the Transparent decision?

Answer 7

When all aspects of the decision to change interest rates are made available to the public, including unites and what way people voted. Members are then accountable to their decisions and must justify these to the public.

Question 8

What is Quantitative easing?

Answer 8

Part of monetary policy and decided by the MPC. The Bank of England can make credit easier to get by issuing liquid assets (cash).
It buys toxic, or bad credit, usually from banks.
£375 Billion since 2008.
Increases liquidity in markets.

Question 9

What are time lags and how do they effect monetary policy in particular?

Answer 9

Changes in interest rates are likely only likely to take full effect after 18-24 months. This is because:
Changes in interest rates don’t automatically effect peoples mortgages or loans (e.g. fixed mortgages)
In the short term people may not be effected by interest rates. It will only be once they take out a loan or save that it will effect them.
May take time for financial markets to react, especially for transactions that have been started prior to changes.
Interest rate changes can be so small that it takes time for people to react.

Question 10

What is a rise in interest rates likely to do to the Pound?

Answer 10

An increase in interest rates would increase the demand for the pound by foreign speculators. A rightward shift in demand.

Question 11

Summarise Fiscal Policy and how it works.

Answer 11

Changes in government spending and taxation to effect AD.
In general, an increase in tax or cut in government spending decreases AD.
Fiscal policy is implemented by the Chancellor of the Exchequer in the Budget.
A fiscal or budget deficit occurs when there is more money being spent by the government than is being received in taxation.
Expansionary fiscal policy occurs when the government is increases spending and decreasing taxation, thereby increasing AD.

Question 12

Taxation?

Answer 12

A charge imposed on citizens and corporate entities to finance government spending.

Question 13

Government spending?

Answer 13

Money spent by the government on state provision of services such as health, education, income support, defence, public transport etc…

Question 14

What are supply-side policies?

Answer 14

Any deliberate attempt by the government to manipulate aggregate supply and shift the curve. The aim to encourage producers to produce more at any given price level.

Question 15

What are the three major supply-side policies?

Answer 15

Labour market policies.
Policies to improve competition between firms.
Policies to cut costs of firms.

Question 16

What are labour market policies and how do they work?

Answer 16

Aim to make the workforce more cost effective and productive. Include education, cutting benefits etc…

Question 17

What are policies to improve competition between firms and how do they work?

Answer 17

Self explanatory. Can include removing patents, relaxing regulations and privatisation to increase efficiency.

Question 18

What are policies to cut costs for firms and how do they work?

Answer 18

May include cutting taxes or reducing the NMW. Will have effects on the economy though.

Question 19

What is a patent?

Answer 19

a government license that gives the holder exclusive rights to a process, design or new invention for a designated period of time. Usually up to 14 years. 20 years in the US. Reduces incentives in the long term but increases competition.

Question 20

Privatisation?

Answer 20

The transfer of assets from the public to the private sector, usually through the sale of shares. Don’t suggest this as a future supply side policy in the UK though.

Question 21

How might the MPC interfere if the government decide to change fiscal policy?

Answer 21

If the MPC believe the government is being too expansionary with its fiscal policy, they may choose to increase interest rates to counterbalance the governments actions.
If there is a large fiscal deficit, the money will have to be made up by borrowing. This increases demand and will cause AD to increase. This will have an impact on financial markets.

Question 22

What links an be drawn between monetary policy and supply-side policy?

Answer 22

If interest rates increase, the costs for a firm will increase which may cause cost-push inflation. This will mean firms are willing to produce less at any given price level.

Question 23

What links can be drawn between supply-side policies and fiscal policy?

Answer 23

Most changes in supply-side policies will have an impact on government spending (fiscal policy).
Supply side policies tend to increase the budget deficit in the short term.
In the long term they can increase the budget deficit, as improved human capital means higher incomes and therefore higher tax revenue for the government.