Macro 1.9 Flashcards
What is a policy instrument?
A tool or set of tools used to try achieve a policy objective.
What is the Bank of England (BofE)?
The central bank in the UK economy which is in charge of monetary policy.
What does the central bank control?
It controls the banking system and implements monetary policy on behalf of the government.
What is money?
An asset that can be used as a medium of exchange, it is used to buy things.
What is the inflation rate target?
The CPI inflation rate target set by the government for the Bank of England to try to achieve.
What is the Monetary policy Committee (MPC)?
Nine economists, chaired by the governor of the Bank of England. They meet once a month to set Bank Rate, the BofE’s key interest rate, and also decide whether other aspects of monetary policy need changing.
What is the Bank Rate?
The rate of interest the BofE pays to commercial banks on their deposits held at the BofE.
What does liquidity do?
Measures the ease with which assets can be turned into cash quickly without a loss in value.
Note: Cash is the most liquid of all assets
What is the money supply?
The stock of money in the economy, made up of cash and bank deposits.
What does a contractionary monetary policy do?
Uses higher interest rates to decrease aggregate demand, shift the AD curve inwards (to the left).
What is exchange rate?
The price of a currency (e.g. the pound), measured in terms of another currency such as the US dollar of the euro.
What does a expansionary monetary policy do?
Uses lower interest rates to increase aggregate demand, shift the AD curve outwards (to the right).
What is a fiscal policy?
The use of taxation, public spending and government’s budgetary position to achieve to government’s policy objective.
When does budget deficit occur?
When government spending exceeds government revenue (G>T).
When does a balance budget occur?
When government spending equals government revenue (G=T).
When does a budget surplus occur?
When government spending is less than government revenue (G<T).
What is public sector borrowing?
Borrowing by the government and other parts of the public sector to finance a budget deficit.
What does demand-side fiscal policy do?
To increase or decrease the level of aggregate demand through changes in government spending, taxation and the balance budget.
What is deficit financing?
Deliberately running a budget deficit and borrowing to finance a deficit.
What does expansionary fiscal policy do?
Uses fiscal policy to increase aggregate demand.
What does contractionary fiscal policy do?
Uses fiscal policy to decrease aggregate demand.
What is a supply side policy?
Policies that seek to improve the long run productive potential of the economy ( a shift outwards in the LRAS)
What is the purpose of a supply side policy?
Improving factors of production (LLEC) to improve the quantity or quality of production.
What are free market supply side policies?
Policies that focus on reducing the size of the state/government and boosting the role of market forces in allocating scarce resources.
Examples: Cutting Gov spending, Lower business and income tax and reducing red tapes/barriers to enter market.
What are government intervention supply side policies?
Increasing state power over the market to have positive long-term effects of the supply-side performance.
Examples: State investment, higher taxes on wealth, increased import control, management of exchange rate to improve competitiveness and nationalisation of key industries.
