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Economics Y1 > Macro 12 - 15 > Flashcards

Macro 12 - 15 Flashcards

1
Q

Monetary policy:

A

Manipulation by gov of monetary variables to achieve its objectives

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2
Q

Fiscal policy:

A

Use of taxation, gov spending and gov borrowing to achieve its objectives

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3
Q

What are the two main monetary policy instruments?

A
  • Quantitative easing
  • Interest rates
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4
Q

What is the relationship between interest rate and aggregate demand and why?

A
  • Higher the interest rates
  • Higher the cost of borrowing
  • Less consumption/investment
  • Lower AD
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5
Q

What is the relationship between interest rates and durable goods and why?

A
  • Higher the interest rates
  • Higher the cost of borrowing
  • Lower sales of durable goods as consumers would have to repay more
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6
Q

In what three ways does buying/moving house increase AD?

A
  • Increase in demand for housing leads to increase in number of new houses being built
  • Stimulates purchase of consumer durables
  • Moving house releases money which can be spent
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7
Q

How do low interest rates cause the wealth effect?

A
  • Increase in demand for housing
  • Prices of housing increases
  • Increase in consumer confidence
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8
Q

What is the relationship between saving and interest rates and why?

A
  • Higher the interest rates
  • Higher the cost of borrowing
  • More attractive to save
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9
Q

What is the relationship between the exchange rate, balance of trade and interest rates and why?

A
  • Lower the interest rates
  • Fall in value of pound
  • Greater exports than imports
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10
Q

Which two groups of people are responsible for monetary policy?

A
  • Bank of England
  • Monetary Policy Committee
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11
Q

What does MPC do?

A
  • Sets Bank of England base rate
  • Decides how QE is to be managed
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12
Q

Quantitative easing:

A

Introduction of new money into the national supply by the central bank

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13
Q

Process of QE:

A

1) Central bank digitally creates money
2) Central bank purchases financial assets from banks + other financial institutions
3) Value of financial institutions rises due ton increased demand for their financial assets

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14
Q

In what two ways does QE lead to greater AD?

A
  • Greater lending by banks
  • Wealth effect leads to greater consumption
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15
Q

What is the end goal by using QE?

A

Inflation target of 2% is reached

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16
Q

What is a balanced budget?

A
  • Gov spending should be somewhat equal to gov revenue
  • Neither budget deficit/surplus
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17
Q

Expansionary demand-side policy:

A

Any changes that shift AD outwards

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18
Q

Contractionary demand-side policy:

A

Any changes that shift AD inwards

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19
Q

What do Classical and Keynesian economists say about the use of monetary and fiscal policy?

A
  • Keynesian: Favour use of both
  • Classical: Only use monetary as fiscal is ineffective
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20
Q

What do Keynesian and Classical economists argue about how quickly an economy can revert to long-run equilibrium?

A
  • Keynesian: Argue an economy could be in short-run disequilibrium for years due to lack of demand
  • Classical: Economies adjust very quickly
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21
Q

What do Keynesian economists argue about the impact of demand-side policy on AD?

A

National debt is not a problem in short-term

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22
Q

What limitation is there of the implementation of demand-side policies

A

There are significant time lags so so it does not fix short-term issues in the short-term may not be fixed

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23
Q

Why do economists disagree about the effectiveness of QE?

A

Asset prices are pushed up, however, rather than building new houses, households and firms buy second-hand homes, which does not increase AD

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24
Q

What do Keynesian and Classical economists argue about the size of the multiplier?

A
  • Keynesian: Multiplier is positive and can be large if fiscal policy is carefully targeted
  • Classical: Multiplier is virtually zero as extra gov spending cuts spending of private sector (crowding out) and increase in budget deficit only leads to inflation, not extra output
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25
Q

Supply-side policies:

A

Policy that tries to increase quality/quantity of factors of production

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26
Q

What happens to LRAS if supply side policy is successful?

A

Shifts right

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27
Q

Two types of supply-side policies:

A
  • Market-based
  • Interventionist
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28
Q

What are interventionist policies?

A

Policies designed to correct market failure

29
Q

In what way can interventionist supply-side policies can be implemented?

A
  • Investment
  • Industrial policies
30
Q

What 3 forms can investment take?

A
  • Human capital
  • Technology
  • Infrastructure
31
Q

What are the two types of investment in human capital?

A
  • Education and training
  • Health services
32
Q

2 advantages of investment in training and education:

A

Numerous positive externalities:
- Increases quality of labour, increases productivity, hence economic growth
- Reduces natural rate of unemployment

33
Q

Give 2 examples of specific measures investing in education and training:

A
  • Retraining programmes
  • Low interest loans/grants assisting young people to pursue education
34
Q

How does improved health care services increase supply?

A

Become healthier, better quality of labour, more productive

35
Q

What is the fundamental activity behind developing new technologies and give examples of how this is promoted:

A
  • Research and development
    Examples:
  • Tax incentives/patents to private sector firms to engage in R&D activities
36
Q

How is investment in infrastructure (physical capital) justified?

A
  • Most infrastructure qualifies as merit/public good
  • Increases efficiencies in production
37
Q

What are the effects of investment in the short-term and long-term?

A
  • Short-term: Increase in AD
  • Long-term: Shift to right in LRAS
38
Q

What are industrial policies?

A

An effort to encourage the development and growth of the economy

39
Q

2 types of industrial policies:

A
  • Support for SMEs
  • Support for infant industries
40
Q

How does support for SMEs and infant industries help supply?

A
  • Promotes efficiency
  • More employment possibilities
41
Q

What are market-based policies?

A

Policies designed to remove barriers to the efficient working of free markets

42
Q

In what ways can market-based policies be implemented?

A

1) Encouraging competition
2) Labour market reforms
3) Incentive-related policies

43
Q

How does encouraging competition increase potential output?

A
  • Greater efficiency in production
  • Improvement in quality of goods and services
  • Increased LRAS
44
Q

What are the 6 ways competition can be encouraged?

A
  • Privatisation
  • Deregulation
  • Private financing of public sector projects
  • Outsourcing
  • Restricting monopoly power
  • Trade liberalisation
45
Q

Why is privatisation believed to be more efficient?

A

Public sector has bureaucratic procedures, high administrative costs and unproductive workers, because they does not have the incentives to lower costs and maximise profits

46
Q

What is deregulation and why is it believed to be more efficient?

A
  • Involves elimination of gov regulation of private sector activities
  • Gov regulation stifles competition and increases inefficiencies
47
Q

What are the 2 types of regulation?

A
  • Economic regulation –> involves gov control of prices, output and others for protection against competition
  • Social regulation –> protecting consumers against undesirable effects of private sector activities
48
Q

Evaluation of social regulation:

A

Some economists believe it is excessive as it results in costly bureaucratic procedures

49
Q

How does the private financing of public sector projects promote competition?

A

Private sector firms compete with each other to be selected by gov to take on project

50
Q

Give examples of public sector projects:

A

Building infrastructure eg. hospitals and airports

51
Q

What is outsourcing and how does this promote competition?

A
  • Public services provided by private firms based on a contractual agreement between gov and private service provider
  • Private firms compete with each other to get contracts w/ gov
52
Q

In what ways can monopoly power be restricted?

A
  • Enforcing anti-monopoly legislation
  • Breaking up large firms engaging in monopolistic practices
  • Preventing mergers between firms that may result in monopoly power
53
Q

What do labour market reforms intend to do?

A
  • Make labour markets more competitive
  • Lower labour costs
  • Match wage responses to changes in supply and demand
  • Lower rates of unemployment
54
Q

In what 4 ways can labour market reforms be implemented?

A
  • Abolishing minimum wage legislation
  • Weakening power of TUs
  • Reducing unemployment benefits
  • Reducing job security
55
Q

How does abolishing minimum wage legislation serve the aims of labour market reforms?

A

Increased wage flexibility allows firms to hire more labour at a lower wage, reducing unemployment

56
Q

How does weakening the power of trade unions serve the aims of labour market reforms?

A

Wages will be more responsive to supply and demand rather than the actions of TUs

57
Q

How does reducing unemployment benefits serve the aims of labour market reforms?

A

Reduces incentive to remain unemployed, encouraging them to look for work, reducing unemployment levels

58
Q

How does reducing job security serve the aims of labour market reforms?

A
  • Makes it easier to let go of workers meaning firms are more likely to hire new workers as they know they can also be let go of easily
  • Labour costs are decreased
59
Q

What do incentive related policies involve?

A

Cutting various types of taxes to change incentives

60
Q

What are the 3 incentive-related policies and their aims?

A
  • Lowering personal income taxes –> increases consumption + AD
  • Lowering taxes on capital gains and interest income –> increases investment + AD
  • Lowering business taxes –> increases investment + AD
61
Q

Advantages of interventionist policies:

A

General:
- Effect on AD in short term
- Provides what market is unlikely to provide w/ gov support in areas like investment and R & D
- Positive equity effects, as unemployment is reduced
Industrial policies:
- Greatest possibilities for growth in future

62
Q

Give 2 examples of situations where interventionist policies have succeeded in comparison to failures of market-based policies:

A
  • ‘Asian Tigers’ (grp of Asian countries) achieved high rates of growth w/ highly interventionist industrial policies
  • Questionable growth performance of many developing countries adopting market-based policies in 1980s
63
Q

Disadvantages of interventionist policies:

A

General:
- Can lead to gov failure
- Rely heavily on gov spending

64
Q

Advantage of market-based policies:

A

Reduces unemployment in long-run

65
Q

Disadvantage of market-based policies:

A

General:
- Increases unemployment in short-run, as privatisation means firms fire workers to cut costs + jobs in domestic market are lost if projects are contacted to firms in other countries
- Negative effects on environment, as increased competition leads to increased scope for negative externalities

Encouraging competition:
- Outsourcing + Private financing of public sector projects may result in high prices, which becomes unaffordable for lower income groups

Labour market reforms:
- Removes protection for workers, increasing income inequality

Incentive-related:
- Impact of AD is greater than impact on AS, as tax cuts tend to increase consumption and reduce saving, which doesn’t necessarily increase output
- Tax cuts mean reduced gov revenues
- Tax cuts have negative equity effects, as it increases the after-tax incomes of the wealthy, reducing redistributive effects and negatively affecting the low-income earners

66
Q

Conflicts of reducing AD to reduce inflation:

A

Likely to lead to a recession or cyclical unemploymemgb

67
Q

What does the Phillips Curve show?

A
  • Trade-off between unemployment and inflation in short-run
  • As unemployment rate increases, inflation decreases
68
Q

Explain the Phillips Curve:

A

As unemployment increases, there is less spending, which results in lower inflation

Economics Y1 (12 decks)

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