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AS Macro Retake > Chapter 3 - The Application Of Macroeconomic Policy Instruments And The International Economy > Flashcards

Chapter 3 - The Application Of Macroeconomic Policy Instruments And The International Economy Flashcards

0
Q

What is monetary policy?

A

Central bank or gov decisions on rate of interest, money supply and exchange rates.

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1
Q

What is fiscal policy?

A

The taxation and spending decisions of a government

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2
Q

What are supple side policies?

A

Policies designed to increase aggregate supply by improving efficiency of labour and product markets

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3
Q

What’s the key aim of fiscal policy?

A

To influence aggregate demand

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4
Q

What are reflationary policy measures?

A

Policy measures designed to increase aggregate demand

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5
Q

What are deflationary policy measures?

A

Policy measures designed to reduce aggregate demand

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6
Q

Why may fiscal policy be implemented for other reasons than to influence AD?

A

To encourage merit goods, to alter incentives, simplify the system

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7
Q

What is discretionary fiscal policy?

A

When a government actively influences AD by changing its expenditure or taxes

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8
Q

What are automatic stabilisers?

A

Forms of gov spending and taxation that adjust automatically to offset fluctuations in economic activity

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9
Q

What is a progressive tax? Hence what is a regressive tax?

A

One that takes a higher percentage from the income of the rich
A regressive tax is one that takes a greater percentage from the income of the poor

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10
Q

What does government spending cover?

A

Current spending
Capital expenditure
Transfer payments
Debt interest payments

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11
Q

What are the five most important individual areas of government spending in the uk currently?

A

Health, education, defence, social protection and debt

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12
Q

What may be the cause of a budget deficit? When is it worrying?

A

Budget deficits occur cyclically, in times of recession, due to the operation of automatic stabilisers. It would suggest something is wrong if there was a budget deficit in the boom phase of the economic cycle.

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13
Q

What are the 3 monetary policy measures?

A

Rate of interest, money supply, exchange rate

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14
Q

What is the impact of central government increasing the exchange rate?

A

Commercial banks will likely follow. Consumer expenditure will fall as e opportunity cost of spending rises. Foreigners will begin to deposit money into UK financial institutions, which will strengthen the pound, decreasing the cost of imports and increasing the costs of exports. This in turn may worsen the balance of payments position. Overall, AD will fall.

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15
Q

Why may an increase in interest rate not increase exchange rate?

A

It may be perceived as an unstable economy, and hence foreigners will move their money out and the exchange rate will fall.

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16
Q

How do changes in the money supply influence AD?

A

Increases in money supply should increase AD, due the fact that banks will have more to loan, it’ll be easier to borrow.

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17
Q

What is the sole purpose of supply side policy?

A

To increase AS

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18
Q

Give some examples of supply side policies (8 in total)

A 
Education and training
Deregulation
Privatisation
Subsidies
Cutting direct taxes
Gov assistance
National minimum wage
Reduction in unemployment benefits
Reduction in trade union power
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19
Q

Describe education and training as a supply side policy

A

This should increase occupational mobility of labour, and labour mobility, and hence increase the value of the labour force

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20
Q

Describe how a reduction in direct taxes would increase aggregate supply. Give a counter

A

The lower taxes increase the incentives to firms, workers and potential workers. Corporation tax cuts increase incentives and funds in firms, and a cut in income tax may encourage workers to work overtime, persuade some to join the labour force.
However it could be argued that it may encourage workers to work less, as they can obtain the same amount of disposable income for less work

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21
Q

Describe reduction in trade union power as a supply side policy. Give a counter

A

This would be the case if the unions pushed wage rates above equilibrium level, and hence would reduce unemployment.
However, trade unions may actually reduce firms costs by acting as a communication channel between them and workers

22
Q

Describe privatisation as a supply side policy, with a counter.

A

The idea is that government intervention should be reduced, and the private sector firms are in the best position to make decisions about what to do, as they are subject to the discipline of the market. Hence privatising will increase overall efficiency
However some argue that gov intervention is necessary to correct market failures

23
Q

Describe deregulation as a supply side policy

A

This makes it easier for new firms to enter, and hence increase competition and pressures to be efficient

24
Q

How would an economy with spare capacity increase employment?

A

By increasing AD.

25
Q

How would an economy go about reducing unemployment, where there is high AD.

A

Supply side policy

26
Q

In what situations would an increase in AD not reduce unemployment?

A

If there were no more jobs
Some may be geographically immobile
Some have lack of skills
Some face prejudice

27
Q

How can a government act to control cost push inflation in the short run?

A

Restrict wages, lower corporation tax, provide subsidies

28
Q

What is the risk of providing subsidies to companies?

A

They may become reliant

29
Q

What’s the main anti inflationary policy instrument used in the UK?

A

Changes in the interest rate

30
Q

How can economic growth be achieved in the short run?

A

By increasing AD, if not producing at full capacity

31
Q

How can low interest rate stimulate both AD and AS to rise?

A

It stimulates investment among firms, as they have to pay back less, and stimulates consumption by individuals as the incentive to save is less

32
Q

How can economic be achieved in the long run?

A

By increasing the quality and quantity of resources

33
Q

What are the three short run policies to improve the balance of payments?

A

Fall in exchange rate, reducing overall demand, specifically reducing demand for imports

34
Q

Describe exchange rate adjustment as a short run policy to improve balance of payments

A

This may be done by lowering interest rate, causing export prices to fall and imports to rise

35
Q

How would government go about reducing overall demand?whats the risk?

A

High tax, lower spending. Risk of causing unemployment

36
Q

Describe import restrictions as a short run policy to improve balance of payments. What’s the risk?

A

May impose tariffs or quotas, which would either raise the price of imports or make them unavailable. Risk is the potential retaliation of countries who you impose restrictions on, who may increase the cost of exports

37
Q

How would a government attempt to improve balance of payments in the long term? What’s the drawback?

A

By increasing the productive potential of UK firms, by subsidies etc. the issue is how long this takes to take effect

38
Q

Give some advantages of fiscal policy

A

Some forms of taxes and spending adjust automatically to offset fluctuations in real GDP. Some forms of gov spending have the potential to increase both AS and AD

39
Q

Describe how time lags act upon fiscal policy

A

It takes time to recognise the need for a change, and for the information to be gathered, on which to base the change. These changes in government spending and tax take time to impact the economy, and there is also the time involved in the formation of new tax and gov spending plans

40
Q

Analyse flexibility of government spending

A

A number of forms of gov spending are inflexible, such as health card and pensions. Many are also already committed to, such as roads and railways

41
Q

Describe inaccuracies in measurements as a constraint on fiscal policy

A

For the policies to actually work, they must be based on accurate information. If not, the action taken may worsen the situation

42
Q

List the drawbacks/risks/potential difficulties of fiscal policy

A

Time lag
Many forms of spending are inflexible
Needs to be based on accurate info
Households and firms may not react as predicted
May have adverse affects on incentives and other objectives
Fiscal policy changes can be offset by changes in Eco activity abroad

43
Q

Describe how changes in fiscal policy may have an adverse effect on incentives and other objectives

A

Eg a rise in income tax, designed to lower AD, may discourage some from working. High corporation tax may discourage investment

44
Q

Give drawbacks on effectiveness of monetary policy

A

Depends on reliable info
Monetary policy instruments can be hard to control
Changes in interest rates take time to work their way through an economy, due to fixed rates of commercial banks etc
AD may not respond to interest rate changes
If interest rates are already low, further cuts may have no impact

45
Q

Describe time lags of interest rate changes, when evaluating effectiveness of monetary policy

A

The interest rates offered by commercial banks may take time to adjust, and then once they have it takes time for consumption, investment and exports to adjust appropriately to achieve the desired effect

46
Q

What are the benefits of supply side policy?

A

Allows AD to continue to rise without inflationary pressure. Higher quality resources should make domestic firms more price and quality competitive, improving the current account position

47
Q

Describe how policy objectives may conflict. How do governments act around this?

A

Objectives such as economic growth and low unemployment may conflict with ones such as low inflation, as the growth may make it more difficult to keep inflation low. Governments respond to this by using a variety of policy instruments

48
Q

What are the advantages of international trade?

A

It enables the country to specialise, as the products it doesn’t produce it can import
Consumers benefit from lower prices and higher quality, as a result of increased competition. Also benefit from greater variation of products
Firms have access to a wider market

49
Q

What are the difficulties of international trade?

A

The competition from other counties causes some industries to contract, with the labour involved having to find new jobs

50
Q

What is protectionism?

A

The protection of domestic industries from foreign competition

51
Q

List some methods of protectionism

A 
Tariffs
Quotas
Voluntary export restraint 
Foreign exchange restrictions
Embargoes
Red tape
52
Q

What is a voluntary export restraint?

A

A limit placed on imports from a country, with the agreement of that country’s government

AS Macro Retake (3 decks)

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