Government Policies and Conflicts Flashcards

1
Q

What is Monetary Policy?

A

The manipulation of interest rates or quantitative easing to achieve macroeconomic objectives, mainly controlling inflation.

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2
Q

Who sets the interest rates?

A

The Monetary Policy Committee.

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3
Q

What is Quantitative Easing and how does it work?

A

The MPC ‘buys debt’ from banks to increase the supply of lendable money to banks.

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4
Q

What problems are associated with the effectiveness of Monetary Policy?

A

There is an 18-24 month time lag.

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5
Q

What effect will rising interest rates have on the strength of the currency?

A

A rise in interest rates will likely strengthen the pound against other currencies as demand for the currency goes up as foreign investors buy more pounds when interest rates are high.

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6
Q

What are the three types of policy the government can implement to shift aggregate demand or supply?

A

Fiscal, Monetary and Supply-Side Policy.

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7
Q

What does fiscal policy involve?

A

The planned amount of taxation, government spending and how much debt to take out/pay back. Fiscal policy is intended to influence the level of spending in the economy.

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8
Q

What is Reflationary/Expansionary Fiscal Policy and what does it involve?

A

Reflationary policy is the decrease of taxation and increase of government spending to increase aggregate demand (tends to increase inflation).

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9
Q

What is Deflationary/Contractionary Fiscal Policy and what does it involve?

A

Deflationary policy involves increasing taxation and decreasing government spending to decrease aggregate demand and reduce the budget deficit (tends to decrease inflation)

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10
Q

When does a budget deficit occur and what affect does it have on aggregate demand?

A

When government spending exceeds its tax receipts. This causes aggregate demand to increase.

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11
Q

When does a budget surplus occur and what affect does it have on aggregate demand?

A

When government spending is less than its tax receipts. This causes Aggregate Demand to decrease.

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12
Q

What change will occur on an AD/AS Diagram upon implementation of Contractionary Policy?

A

The AD curve will shift to the left.

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13
Q

What change will occur on an AD/AS curve upon implementation of reflationary policy?

A

The AD curve will shift to the right.

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14
Q

What are the three major types of Supply-Side policy?

A

Labour Market policy, policy to cut costs for firms, and policy to improve competition between firms.

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15
Q

What do Labour Market Policies aim to do and what are some examples?

A

They aim to make the workforce more effective and productive. E.g. Improvement of education and training (long term) or cutting benefits to incentivise workers (short term).

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16
Q

What is an example of a supply side policy to improve competitiveness between firms?

A

Removing patents to make it easier for new firms to set up.

17
Q

Give examples of a supply side policy that cuts costs for firms.

A

Cutting Taxes or reducing the National Minimum wage.

18
Q

What affect will supply side policies theoretically ALWAYS have on an AS/AD diagram?

A

The AS curve will shift to the right, decreasing the General Price Level and increasing real equilibrium output.

19
Q

What affect will reflationary fiscal policy have on monetary policy?

A

The MPC may react to the increasing effect on inflation by raising interest rates.

20
Q

What effect will deflationary fiscal policy have on monetary policy?

A

The MPC will likely react to the decrease in inflation by cutting interest rates.

21
Q

What effect may rising interest rates have on aggregate supply?

A

Interest rates rising will increase costs of production for firms which may decrease Aggregate Supply.

22
Q

What effect may falling interest rates have on aggregate supply?

A

Falling interest rates will decrease costs of production for firms, increasing aggregate supply.

23
Q

Short term, how does supply side policy affect the budget deficit?

A

Supply side policy tends to increase the budget deficit due to the increased level of government spending required to implement.

24
Q

Long term, what affect may supply side policy have on the budget deficit?

A

Supply side policy will likely decrease the budget deficit if it is successful in the long term, because the effects of the policy will definitely be in full effect.