Govpolicy Flashcards
Demand side
Demand side evaluation
Time lag for both and mon monatary 2yrs
No effect long run
Depends where economy is operating no effect is at full employment and trying to rise or if it’s in the flat part
Inflationary unemployment
Causes and UK RESPONSE of Great Depression
Wall st crash 1929 share prices sharp fall in NY stock exchange
- loss of consumer confidence and business confidence as shareholders lost money other worried and firms cut investment so AD fell more
- banks over lent in 1920s Gov allowed banks to fail after the crash so confidence fell further causing a fall in AD
- protectionism may have also caused the Great Depression less world trade less AD less confidence. Smoot- hawley tariff act decreased imports to us.
- uk confirming to the gold standard.
Recommitting to this meant value of pound grew a lot and exports fell rapidly.
Response
Ik Gov tried balance budget and borrowed from private sector introduced emergency budget cut public sector wages and unemployment benefits by 10% and raised income tax from 22.5 -25% reduced AD when it was meant to increase.
Left the gold standard value of £ fell 25% and IR was cut 2.5% helping to increase AD and balanced budget meant Ik didn’t have to borrow from abroad helping exchange rate + used high interest rates decreased demand.
US Great Depression response
FDR new deal expanded federal Gov public sector investment and fiscal stimulus and work schemes.
Reached full employment by 1943. FDR used Keynesian expansionary fiscal policy. Arguably not large enough to be successful but had an impact on unemployment figures.
2008 financial crisis
In early 2000s relatively poor people encourages by Gov and banks to take out loans and bank workers saw higher bonsusss for selling mroe mortgages leading to moral hazard. Given low interest rates on loans for first few years but couldn’t continue paying. Houses repossessed demand fell prices fell meaning the value of houses less than the mortgage. Negative equity.
When people saw this confidence fell. Banks stopped lending. Between eachother similar things happened in Ik and Spain.. Lehman brothers ( investment bank) failed people panicked thinking all banks would leading to loss for savers.
Both UK AND US forced to nato slide banks and building societies wnd guarantee savers their money to prevent chaos. Eg. British Gov bougjt northern rock and most of royal bank of Scotlandand Lloyds. Used expansionary monetary policy. US used expansiober fiscal policy perhaps why they recovered faster.
Supply side policy
Aimed to increase productive potential overtime
Market based policies - designed to remove anything that effects free market system from working efficently causing lower output and higher price. These barriers I ckdue those which reduce willingness of workers to take jobs or lead to inefficient production , higher prices or lack of risk taking.
Interventionalsit policy- designed to correct market failure eg. Free market under-provides education so Gov provides.
Free market economists prefer market based for smaller Gov role.
Examples of SSP
- increase incentive to work and therefore side of work force can be done w fall in benefits prevents poverty or unemployment trap offer tax breaks for hiring workers to firms reduce mum wage to make more jobs.
-promote competition eg. Privatisation or cMA to stop monopoly
- reform labour market : increase retirement age , Weaken unions , more labour mobility.
- education and improve skills
- increase high skilled migrants
- improve infrastructure offer tax incentive or subsidy on investment.
But tax breaks Bsd for budget
Eval of SSP PHILLIPS CURVEEE
- increase output decreases price unlike demand side policy so good
- long term policy lead to econ growth
- improve BOP
- because 2 SSP types market based and interventionist both kinds will use ssp
- not all SSP works might conflict w objectives
- longtime to work
