Macroeconomic Key Points Flashcards by Rajan Dhaliwal

Interest rates effect through credit

More demand for credit
More consumption
Lower MPS Higher MPC
D outwards shift
P and Q (inelastic or elastic)
Inflation
Movement towards FE

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Interest rates effect through BoP

Less FDI
HM outflows, capital flight
Decrease D for £
Depreciation
Better trade balance
Dearer M
Movement towards current account surplus

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Interest rates effect through budgetary position

Base rate increase
CR increase
assumption same mag and dir
balance budget sheets of B

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Interest rates effect through wage

increased confidence/animal spirits
anticipate inflation
wage up, prices up, cost push
wage price spiral due

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Interest rates effect through supply

stimulate investment into prod. capital
increased confi
shift in ad and ;ras
therefore growth and emp, p the same
macro objectives

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Evaluation of IR:

Forward guidance transparency (timing)
magnitude of change (stability)
economy stage
confidence
time lag
passing on - £23bn big 4 banks

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Types of budgetary position

Structural and Cyclical

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structural is when

gs =/ taxation
hard to eliminate
discretionary fp

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discretionary fp

active change to gs and t%
school funding
LR

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Cyclical is when

economic cycle
automatic stabilisers help

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automatic stabilisers

increase gs for SR
benefits
decrease tax rate

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Ricardian equivalence

cut tax rate in SR
national debt increases as ind. anticipate tax rise going forward
negates effects of EFP

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Inflation pros

nominal wage increase
econ growth

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Inflation cons

possible recession
falling savings value
squeeze on public sector costs

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Inflation effect on gini coeffient

erodes value of savings
savers hurt, borrowers gain
poor higher % income on subsistence
VV
REGRESSIVE

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eval: inflation on gini

high no. of indebted are poor
inflation erodes value of debt
rich likely to save
potential for limiting regression
Arbitrary redistribution

interventionist SSP

R+D and training (human capital)
Infrastructure
Subsidies
Healthcare

boost LRAS

laffer curve drawbacks

theoretical model
impossible to know where you are

laffer curve chain

increase TR till a point
m=o then decrease:
disincentives to work
tax evas/avoid
emigration
higher skilled, make up TR a lot

achieve all 4 macro obj

growth unemployment - interest rates low therefore inflation cost push may erode currency

srpc unemployment and inflation - lrpc

drawbacks of SRPC

does not show LR
monetarists adapted to show LR in LRPC

SRPC Chain

conflict between infl. and unemployment
trad AD shift
movement along SRPC
inverse
demand pull infl

stagflation

shift in SRPC inwards

LRPC point

NARIU AND NRU

COVID monetary policy

interest rates 0.75% to 0.1% no effect so QE (495 bn) growth, decresed U, prevented deflation

covid mon lead to

high inflation 11.1% banks uncertain not willing to lend constricted growth for a while

present day monetary policy

IR 0.1 to 5.25 quantative tightening to decrease inf

cons of monetary

bank failure (silicone valley, credit suisse) insolvency decreased growth and increase U decreased investment

combat economic inactivity

interventionist ssp lower benefits and consumer taxes

decrease NRU

Infra and edu combat hysteresis

regional growth

interventionist corp tax and subs

productivity

labour market reform (min wage relax immigration) cut corp interventionist

deflation chain

deflation suggests inwards shift in AD falling confidence Falling prices, falling GDP higher savings ratio, MPS up rev businesses fall cyclical unemployment unemployment and growth conflict with obj

deflation chain eval

Benign deflation good (supply shift) deflation could be caused by increase in aggregate supply, perhaps due to infrastructure improvements

eval of inflation

Depends on the nature of inflation → if your in a recession increasing inflation builds growth This could lead increase in AD higher spending signals to increase output, reduction in unemployment

crowding out

government needs to borrow for GS increased psncr adding to net debt (GS>T amount) sell bonds to fund x, savings Outwards D for LF PS borrow less (highr IR) Less productive capital -> less growth classical idea, against GS

crowdin out eval

Q LF is not limited, drastic change in IR unlikely external finance available Keynesians temp GS increase multiplier effect if the economy is under-utilised (capacity) Extra T rex and employment