Macro 2.6 Flashcards
What are the four key macroeconomic objectives of the UK government?
- Economic growth
- Low unemployment
- Low and stable inflation
- Balance of payment equilibrium on the current account
These objectives aim to improve the economic performance of the UK.
What is the long run trend of economic growth in the UK?
About 2.5%
Governments aim for sustainable economic growth over the long term.
What unemployment rate does the UK government aim for?
Around 3%
This accounts for frictional unemployment and aims for near full employment.
What is the government target for inflation in the UK?
2%, measured by CPI
The target aims to provide price stability for firms and consumers.
What happens if the inflation rate falls 1% outside the target?
The Governor of the Bank of England must write a letter to the Chancellor of the Exchequer
This letter explains the reasons for the deviation and the intended corrective actions.
What does the balance of payment equilibrium on the current account ensure?
Sustainable financing of the current account
This is important for long-term economic growth.
Name two additional macroeconomic objectives of the government.
- Balance government budget
- Protection of the environment
- Greater income equality
These objectives contribute to overall economic stability and equity.
What is the role of monetary policy in achieving macroeconomic objectives?
To manage demand through interest rates and money supply
This can involve increasing or decreasing AD based on economic conditions.
How do interest rates affect aggregate demand (AD)?
A rise in interest rates causes a fall in AD through:
* Increased cost of borrowing
* Higher attractiveness of savings
* Reduced demand for assets
* Decreased consumption and investment
Each of these mechanisms contributes to a decrease in overall demand.
What is the repo rate?
The rate the Bank of England charges for short-term loans to other banks or financial institutions
Changes in the repo rate affect market rates offered to consumers and businesses.
What are demand-side policies designed to do?
Manipulate consumer demand
These policies can include expansionary and deflationary measures.
What is quantitative easing?
When the Bank of England buys assets to increase the money supply
This is used to stimulate demand during low economic activity.
What are direct taxes?
Taxes paid directly to the government by the individual taxpayer
Examples include income tax and national insurance.
What are indirect taxes?
Taxes where the burden can be passed on to consumers
An example is VAT.
What is a budget deficit?
When the government spends more money than it receives
This can lead to increased national debt.
What impact does a rise in income tax have on aggregate demand?
It causes a fall in disposable income, reducing consumption and thus AD
This is because people have less money to spend.
What is the main aim of the Monetary Policy Committee (MPC)?
To keep inflation at 2%
Deviations from this target require explanations to the Chancellor of the Exchequer.
What is a liquidity trap?
A situation where low interest rates do not stimulate aggregate demand
This can occur when consumers and businesses lack confidence.
What could be a consequence of high interest rates?
Increased incentive for foreigners to hold money in British banks
This can lead to a rise in the value of the pound, affecting imports and exports.
What is the effect of quantitative easing on asset prices?
It causes a rise in demand and thus asset prices increase
This can lead to a positive wealth effect, encouraging consumption.
What are the problems associated with quantitative easing?
- Risk of high inflation
- Potential dependency on the policy
- Inequality from rising asset prices
These issues can undermine the intended benefits of the policy.
What is the impact of fiscal policy on long-run aggregate supply (LRAS)?
Government spending can impact LRAS by affecting quality of services
Reductions in spending can lead to decreased investment in education or technology, impacting future growth.
What is the view of classical economists regarding demand management?
They argue it has no effect on long-run output and advocate for supply-side policies
Classical economists believe that increasing AD during a depression will only lead to higher prices.
What do classical economists argue about demand management?
They argue that demand management will have no effect on long-run output and that supply-side policies should be used.
According to Keynesians, how long can an economy remain in long-run equilibrium?
Keynesians argue that an economy can be in long-run equilibrium for years.
What happens to AD if the economy is at full employment?
A rise in AD will only lead to higher prices.
What is the biggest issue with demand-side policies?
An expansionary policy is often inflationary while a deflationary policy brings unemployment.
What can fiscal policy achieve in terms of supply-side economics?
Fiscal policy can have significant impacts on the supply side, such as increasing spending on education to boost LRAS.
What was a major cause of the Great Depression?
The Wall Street Crash of 1929.
What effect did the loss of consumer and business confidence have during the Great Depression?
It led to a downward spiral in AD as firms cut back investment.
What did the US banking system do during the 1920s that contributed to the Great Depression?
Banks lent too much and created an unsustainable boom.
What was the Smoot-Hawley Tariff Act of 1930?
It decreased imports to the USA and reduced world trade.
What was Franklin Roosevelt’s New Deal?
It was a promise of public sector investment, work schemes for the unemployed, and fiscal stimulus.
What was the UK’s approach to recovery during the Great Depression?
The UK prioritized balancing the government budget over providing a fiscal stimulus.
What happened to the UK pound on 21st September 1931?
The UK was forced to leave the gold standard, causing the value of the pound to fall by 25%.
What caused a fall in confidence during the Global Financial Crisis?
The revelation that banks were holding assets worth less than they had paid for them.
What were the policy responses in the UK during the Global Financial Crisis?
The government nationalized banks and building societies and guaranteed savers their money.
What are supply-side policies aimed at?
Increasing the productive potential of the economy and moving the supply curve to the right.
What are market-based policies designed to do?
Remove barriers that prevent the free market system from working efficiently.
What is the purpose of interventionist policies?
To correct market failure and encourage investment.
Fill in the blank: A reduction in benefits/taxes will increase the _______ of being out of work.
opportunity cost
What is the unemployment/poverty trap?
A situation where low-income workers end up in the same or worse position after gaining a new job due to lost benefits.
What does competition policy aim to prevent?
Monopolies and illegal price-fixing agreements.
What could increasing the retirement age lead to?
More people working, resulting in increased production of goods and services.
What is the effect of setting the minimum wage above the equilibrium level?
It can cause increased unemployment.
How can reducing benefits impact aggregate demand (AD)?
It can lower AD if those unable to find jobs reduce their spending.
What is the potential downside of deregulation and privatisation?
It may lead to poorer quality services and environmental issues.
True or False: Reducing benefits will always lead to increased aggregate demand.
False
What is the effect of reducing benefits on aggregate demand (AD)?
Reducing benefits lowers AD if individuals are unable to find jobs, potentially causing a further fall in employment.
The poor have a high marginal propensity to consume (MPC), so a reduction in income leads to a significant decrease in spending.
How does making the labor force more flexible impact job security?
It leads to decreased quality of life due to less job security and potentially odd working hours.
This can also result in low pay, increasing income inequality.
What is one potential benefit of increasing spending on education and training?
It creates a more educated workforce, increasing efficiency and the ability to perform skilled jobs.
This includes academic education and improving on-the-job training, such as apprenticeships.
What are T-Levels?
T-Levels are qualifications introduced by the government as an A Level equivalent focusing on technical education.
They aim to improve the skills of the workforce.
What is the purpose of the Apprenticeship Levy?
It is a tax on salaries in large companies to fund staff training.
However, its effectiveness has been questioned due to a decline in the quality and number of apprenticeships.
How can an increase in high-skilled migrants affect the workforce?
It can improve the quality of the workforce and address skills shortages.
The government has relaxed rules for skilled immigration to fill 800,000 unfilled vacancies.
What are the potential downsides of improving education in terms of opportunity cost?
Improving education incurs an opportunity cost as government funds may be diverted from other sectors.
Additionally, it takes time to see the effects of increased education.
What distinguishes supply-side policies from demand-side policies?
Supply-side policies can increase output and decrease prices, leading to long-term economic growth.
They focus on improving production capacity rather than just increasing demand.
What is the Enterprise Investment Scheme?
It provides tax relief for individuals who invest in small companies for investment purposes.
This aims to encourage investment in the UK.
What is a significant challenge regarding tax incentives or subsidies for businesses?
They can lead to a loss of tax revenue or may be used for tax evasion rather than genuine investment.
Additionally, not all investment will successfully increase supply.
What is the relationship between economic growth and environmental protection?
Economic growth often leads to increased resource use, pollution, and habitat destruction.
However, growth can occur without damaging the environment, although it may be slower and more costly.
What is the Phillips curve?
It shows a trade-off between inflation and unemployment, suggesting that lower unemployment can lead to higher inflation.
This relationship was challenged during the 1970s when stagflation occurred.
What is the impact of expansionary fiscal policies on the balance of payments?
They can worsen the balance of payments as increased demand may lead to higher imports.
This is due to some of the increased demand for goods and services being met by imports.
How do changes in interest rates affect long-term investment?
High interest rates can discourage long-term investment as businesses are less likely to invest.
Conversely, low interest rates may increase income inequality.
What is the effect of fiscal deficits on government policy?
To reduce fiscal deficits, the government may cut spending and increase taxes, reducing AD and economic growth.
This can disproportionately affect the poor, who rely more on government services.
