fiscal policy Flashcards
macroeconomic objectives 1
- sustainable economic growth
increase in real gdp
increase in real value of goods and services produced in an economy in a given period of time
government aims for sustainability, promoting long term growth avoiding busts
- high economic growth leading to a rise in real incomes, higher standard of living
macroeconomic objective 2
- price stability
aiming to keep inflation/ rate of increase in prices low and stable
price stability measured by consumer price index
uk target rate for inflation - 2%
macroeconomic objective 3-
low unemployment
government wants low unemployment
(there will always be people who are temporarily unemployed)
macroeconomic objective 4-
sustainable fiscal defecit and national debt
(fiscal defecit, when gov spends more than received in tax/ revenue accumulated from tax)
governments must borrow, but aim to reduce the amount of borrowing they do
if interest payments on debt are high, theres a higher opportunity cost
government debt is public debt-
debt owned by households is consumer household debt
macroeconomic objective 5-
low income inequality and poverty
no explicit target for inequality and poverty but does not want it to become too large
high inequality and poverty leads to social unrest which impacts standard of living
inquality measured by gini coefficient (measures distribution of income between individuals/households)
macroeconomic objective 6- stable current account
want to improve international competitiveness so exports are promoted
what is the monetary policy committee
The Monetary Policy Committee (MPC) sets the ‘base rate’ of interest for the economy. This is used by banks and other such institutions as a guide.
9 members
how does central bank try to achieve inflation target
interest rates
quantitative easing
quantitative easing is when central bank introduces new money into money supply
what happens when the interest bank rate (central bank) is lowered
leads to a lower LIBOR
- London inter-bank offered rate
which is tha rate at which commerical banks lend and borrow from each other
they can pass this change onto their consumers via decrease in mortgage rates and loans
purpose of interest rates
This interest rate is used by banks as a guide for their interest rates when lending to individuals and businesses.
how does the bank rate falling affect housing market
mortgages cheaper because interest rate charged by banks has fallen
first time house buyers can take out more mortgages
-allows housing market to boom
exisiting homeowners experience positive wealth effect, houses are going up in value
- may take out larger mortgages giving them more to spend
existing mortgage owners will have lower monthly payments, more left in their disposable income to spend elsewhere in economy
how does bank rate falling affect consumption
loans cheaper, there is more borrowing to finance consumption e.g consumer durables- ad rises, positive multiplier effect
return on savings falls when interest rate falls, opportunity cost of consuming falls, people will spend more
bank rate falling affect on government spending
lower corporate borrowing rates, government can borrow money at a lower interest rate
gov can borrow money more cheaply, running a fiscal defecit becomes less negative than when there are higher interest rates
(in a booming economy, tax revenue may rise so fiscal budget defecit is less likely )
how does bank rate falling affect trade and exchange rates
lower interest rates= hot money flows out (money flowing that chases high rate of return)
- increase in supply of sterling
-fall in demand for sterling
- currency depreciates
- imports are more expensive
- exports cheaper in foreign currency terms
demand for imports fall, demand for exports rise, value of exports rise, value of imports fall,
trade defecit falls and AD rises
fall in bank rate on business investment
loans are cheaper, easier to meet minimum (hurdle rate of return ) projects
more projects undertaken, e.g. construction so real gdp rises
unprofitable projects now become profitable
