Macro Economics Flashcards
What is Fiscal Policy?
Use of Government Spending and Taxation
What will be the likely fiscal policy during a recession?
Government spending may increase or cut taxes to stimulate the economy
What will be the likely fiscal policy during a boom?
Government spending may be reduced or taxation increased to damped demand
What is the effect of Fiscal Policy for investments?
The approach taken by government will impact on individual investments respectively, raising or reducing profit making capability
What is Monetary Policy?
The control of interest rates and money supply
What is the aim of monetary policy?
To provide economic stability through manipulation of interest rates and money supply
Who is responsible for setting interest rates in the UK?
Bank of England
How long does a change in interest rates take to have a real impact?
Full impact in 18-24 months time
What has more impact on the UK economy, £1 billion of government spending or £1 billion of tax cuts? Why?
Government spending will have more of an impact as the bulk would be spent on domestically produced goods and services.
In contrast, a cut in taxation will be spent more on imports and leak out of the UK economy
How would fiscal policy affect the behavior of a business?
The tax treatment of a company’s earnings will affect its dividend policy, and the choice of raising capital through debt or equities.
What are the main economic issues with a sustained deficit
1) Has to be paid back at some point. Lower spending or higher taxes slows the economy down in the future
2) Sustained deficits raise interest rates which dampens economic activity
3) Causes a rise in government debt so that interest payments become a significant element of public spending
4) Deficits reduce total national savings, resulting in lower investment and reducing output and growth
What is narrow money referred to as?
M0
What is broad money referred to as?
M4
What does M0 comprise of?
This comprises of notes and coins in circulation, plus banks operational deposits with the BOE
What does M0 indicate?
It is an indicator of consumer spending and retail sales
