Macro- policies Flashcards
what are the macro objectives?
- sustainable economic growth
- price stability
- low unemployment
- reduce inequality
- sustainable current account and debt
what is a fiscal debt?
when govt spends more than receives in tax revenue
what is monetary policy?
controlled by central bank:
- controls interest rates
- QE
what are the impacts of changing interest rate?
- housing market- mortgages cheaper- existing mortgage owners pay less interest so spend elsewhere
- increase consumption- less saving
- increase govt spending
- currency depreciates
- business investment
what is QE?
- central bank creates new money
- use it to buy bonds
- by selling bonds to central banks or commercial banks now more money to spend elsewhere. New money injected into economy
what are the issues with QE?
- increase money supply=inflation= more money chasing same prices so prices rise
- financial institutions can hoard money
how is fiscal policy used in macro?
redistributing income and wealth through transfer payments
what is fiscal policy?
- use of govt spending/taxation
- contractionary/tight/ deflationary- decrease GS/ increase taxation
- expansionary/loose/inflationary- Increase GS/ decrease T
what is fiscal policy used for?
- promoting growth, employment
- tackle government fiscal position- deficit/debt
- there are supply side implications
how does fiscal policy impact AD/AS?
decrease govt spending and or increase tax:
- Decrease G- G is a component of AD
- increase tax- decrease disposable Y for consumers, decrease profit for firms, C and I fall
- AD shifts left
increase in GS/ decrease in T:
- increase G- component of AD
- decrease T- increase disposable Y, increase profits, C and I increase
- AD shifts right
how does fiscal policy link to the circular flow?
decrease G/ increase T:
- increase T rates, increase MPT, MPW so 1/MPW falls
- more taxation (more withdrawals) less GS (less injections)- smaller economy
Increase G/ decrease T:
- decrease T rates, MPT fall, MPW fall so 1MPW increase
- lower taxation (less withdrawals) increase GS (more injections) = larger economy
how can you evaluate fiscal policy?
- taxes are unpopular- govts run risk of being deselected and taxes can be avoided
- lower GS can lead to a loss in quality of public services- damage govt rep
- depends on scale and speed of changes in tax or spending
- fiscal changes have time lags
- depends on which taxes are changed
what is supply side policy?
- a variety of policies
- interventionist- investment in infrastructure, incentives to work min wage laws, investment in education
- market based- privatisation, deregulation, improve flexibility of mkt, cuts in corporation taxes
what is supply side policy used for?
- promoting growth, employment
- can reduce inflationary pressure
how does supply side impact AD/AS?
implementation of any supply side policy:
- increase efficiency, productivity and increase productive potential
- LRAS shift right, lower inflation, increased employment
how does supply side link to the circular flow?
- SSP can come from govt or private sector
- increase on G or an increase in I
- both increase injections so size of the economy gets bigger- exact increase depends on the size of the multiplier
how do you evaluate supply side policy?
- most SSPs have a big time lag
- they only increase potential output- need appropriate increases in AD to see actual growth occur
- opp cost for any investment
- will not work in a recession- caused by lack of demand
- can be counter-productive
how do you evaluate monetary policy?
- if interest rates increase, saving increase in short run but might lead to increased I in longer term
- increased r is good for savers (older gen) but bad for borrowers (younger and middle gen)- increase inequality/wealth
- depends on size and speed of changes in r- larger or frequent changes can undermine consumer/business confidence in the economy
what are the conflicts between objectives?
- agreement on the best target
- high economic growth= rising prices resources= conflicts price stability
- decrease inequality by raising tax on rich= disincentives workers
- reduce unemployment by spending on training=bigger deficit- more employment=more tax in future
- economic growth in cities=inequality
- economic growth at expense of environment- more invest in green tech after growth
what does the Philip’s curve show?
that there is a tradeoff for policy makers between unemployment and inflation (both can’t be low)
