Macro: Contextual Analysis Flashcards
Macroeconomic Policy - Monetary Policy
What is monetary policy, and how has it been used recently?
Low interest rates: After the EU referendum, the Bank of England reduced interest rates to 0.25% to stimulate demand and prevent a reduction in GDP growth.
Low interest rates: Governments reduced interest rates during the COVID-19 pandemic to cope with reduced demand and investment.
High interest rates: The Fed increased interest rates during America’s longest economic expansion (2009-2020) to prevent demand-pull inflation but dropped them amid the U.S.-China trade war.
Green Quantitative Easing: Central banks buy bonds from companies funding environmentally-friendly projects.
Macroeconomic Policy - Monetary Policy
What is the role of central banks as a lender of last resort?
During the 2008 Global Financial Crisis (GFC), the Federal Reserve lent to Wall Street banks to prevent insolvency but allowed Lehman Brothers to fail to avoid moral hazard.
How has COVID-19 affected central bank independence?
The European Central Bank (ECB) announced a €750 billion Public Sector Purchase Programme (PSPP), opposed by the German High Court, sparking debates over central bank independence.
COVID-19 has led to unprecedented quantitative easing, blurring the line between monetary policy and government debt management.
What is Flexible Average Inflation Targeting (FAIT)?
The Federal Reserve’s new approach to inflation targeting, ensuring 2.0% inflation on average over the long term, allowing for periods of higher or lower inflation.
What is monetary financing, and why is it controversial?
Central banks directly buy government bonds to finance spending, which threatens their independence and could lead to higher inflation due to reckless government spending.
What are the limits of monetary policy during COVID-19?
Central bank independence is threatened.
Interest rates are already very low, with little room for further cuts.
Quantitative Easing is subject to diminishing returns as firms delay investment due to uncertainty.
How has corporation tax in the UK changed, and what are the effects?
Corporation tax decreased by 9% from 2010 to 2019, aiming to stimulate investment, but uncertainty from Brexit and the U.S.-China trade war delayed this effect.
What is the impact of Heathrow Airport’s third runway rejection?
The court of appeal rejected Heathrow’s third runway due to environmental concerns, despite its potential to boost economic growth and create jobs.
What is Boris Johnson’s “triple-tax lock”?
A pledge to not raise VAT, income tax, or National Insurance Contributions, potentially increasing disposable income and boosting consumption.
How has COVID-19 affected government budgets?
Many governments, including Germany, have entered budget deficits due to large stimulus packages, despite traditionally favoring balanced budgets.
What is financial repression?
Governments channel funds from savers to reduce debt by keeping inflation higher than interest rates, eroding the value of debt but reducing returns for savers.
What were the effects of Greece’s fiscal austerity during the European debt crisis?
Greece cut spending and raised taxes, leading to increased unemployment, a 25% decrease in economic growth, and reduced spending on training and education, lowering productivity.
What is the Digital Markets Unit (DMU)?
A UK regulatory body within the Competition and Markets Authority (CMA) that regulates firms with “strategic market status” using “ex ante” regulation to prevent market power abuse.
What are some examples of supply-side policies?
£400 million spent on improving schools and raising teachers’ salaries to £30,000 by 2022.
Boris Johnson’s immigration plans to attract skilled workers.
China’s “Made in China 2025” plan to expand high-tech sectors.
What is the impact of privatisation on industries?
British Airways saw increased efficiency after privatisation in 1987.
The probation industry failed under privatisation, leading to re-nationalisation by 2021.
What is the HS2 project, and what is its goal?
A high-speed railway connecting London, Birmingham, and Manchester, aimed at improving labour mobility across the UK.
What is the impact of trade unions on the economy?
Trade unions negotiate higher wages and better conditions, increasing firms’ costs, which can lead to higher prices for consumers.
Reducing union power can lead to a “work-to-rule” approach, where workers do the bare minimum, reducing productivity.
What are exchange rates, and how do they affect economies?
Exchange rates are volatile and influenced by geopolitics and economic conditions.
A stronger currency makes exports more expensive and imports cheaper, as seen with the Pound’s rise against the Euro in 2015.
What is the impact of a strong dollar on the U.S. economy?
A strong dollar makes imports cheaper, but domestic firms lose profits as consumers buy cheaper foreign goods.
What are fixed exchange rates, and why are they used?
Fixed exchange rates, like the UAE’s with the U.S., promote stability, especially in oil prices, reducing uncertainty for investors.
How does China manage its exchange rates?
China cuts interest rates to devalue the Yuan, making exports cheaper and boosting demand, as seen before the COVID-19 pandemic.
What is the impact of COVID-19 on globalisation and trade?
COVID-19 forced countries to close borders, halting imports and exports, and encouraged firms to domesticate supply chains, potentially raising prices and reducing resilience.
What is “China plus one”?
Foreign firms are moving supply chains away from China as it transitions from a low-income country, leading to higher wages and costs.
What are the disadvantages of Foreign Direct Investment (FDI)?
FDI can “crowd out” domestic investment and threaten economic welfare, as foreign investors may be less aware of consumer preferences.
What is the impact of tariffs and quotas on trade?
Tariffs and quotas arise from geopolitical factors, such as the WTO’s ruling allowing the EU to impose tariffs on $4 billion of U.S. imports due to illegal subsidies to Boeing.
What is the impact of globalisation on employment?
Globalisation has led to outsourcing of factories to low-income countries, causing structural unemployment in Western countries, particularly in textiles and manufacturing.
What is the impact of Brexit on the UK’s global influence?
Brexit has damaged confidence in the UK, with Northern Ireland remaining in the single market and talks of a Scottish referendum weakening the UK’s reputation.
How did China rise to become a global superpower?
China transitioned from a command economy under Mao to a market economy under Deng, creating Special Economic Zones (SEZs) to attract FDI and imports, lifting 700 million people out of poverty.
