Macroeconomic Objectives Flashcards
What are the 7 macroeconomic objectives?
Improve economic growth, decrease unemployment, maintain inflation around 2%, keep BoP in equilibrium, decrease debt, inequality decreases, sustainability increases
What do the MPC do?
Monetary policy committee, decide base rate for interest (repo rate)
What is the impact of a rise in interest rates on AD?
Increases cost of borrowing and increases incentive to save, so reduces AD
What is the impact of a rise in interest rates on the housing markets?
Short-run loss of demand so negative wealth effect
What can be an example of a negative wealth effect ?
A fall in demand for shares, stocks and bands - leads to a fall in prices for these assets ( negative wealth effect )
Why does a rise in interest rates lower confidence on borrowing?
Greater risk + spending reduces confidence
What is the negative effect of debt on a rise on interest rates which impacts AD?
Increased debt on loans, more income spent on these loans which reduces AD
What is the impact of an increase in interest rates on the value of the pound?
Increased incentive for foreigners to hold money in British Banks as greater rewards, rise in demand for the £ which increases the value
Issues of using tight interest rates to boost the value of the pound?
A value of the pound increasing will worsen the BoP deficit in the long run, in the short-run it improves though
Issues with using loose monetary policy?
Liquidity trap, lack of confidence
Overall impact of a rise in interest rates (tight monetary policy) on the economy
Increased cost of borrowing/greater reward for saving - reduced AD and inflation
What is Quantitive Easing?
The Bank of England create money electronically to buy bonds/assets, increased demand do bonds/assets price rise. Rise in price reduces interest return, causing a drop in interest rates which reduces incentive to save and costs of borrowing. As a result, investment and consumption increases which leads to an increase in AD, so provides a major fiscal stimulus.
What are the risks of Quantitive easing?
If not done correctly, can cause hyperinflation as money supply increases rapidly so value falls
Why is there in guarantee over the effectiveness of Quantitive easing?
No guarantee that higher asset prices lead to higher consumption - if given to rich likely to reinvest as lower MPC
What are the issues with QE?
Hurts first-time buyers as house prices rise due to increased demand, increased asset value worsens inequality, can lead to an over dependence on QE
What is the Role of the Bank of England?
Monetary Policy Committee, use monetary policy to control economy - aim to keep inflation at 2%
What is direct taxation?
Paid directly to the government (income tax - 25% of all revenue)
What is indirect taxation?
Person charged can pass costs to someone else (I.e VAT)
Negative impacts of deflationary fiscal policy on LRAS
Cut in spending can reduce quality of education/training, reducing LRAS
Negative impacts of tight fiscal policy on inequality?
Increased inequality due to higher regressive taxes, also lowers incentives to work
What are the other issues with fiscal policy?
Political issues, also reliant on the size of the multiplier - greater the size, greater the impact on AD
Evaluation of demand-side policies on long run output
Argument that it will have no effect on the long-run output, Keynesian LRAS argues the impact of changes in AD depends on where the economy is operating
Other evaluations of demand-side policy
Time lag, conflicts of objectives - expansionary worsens inflation and contractionary worsens unemployment
What is the advantage of using monetary policy over fiscal policy?
Monetary is useful as can help increase demand without increasing spending, so doesn’t worsen the deficit
What is the advantage of using fiscal policy over monetary policy?
Fiscal is more useful in targeting specific groups and reducing poverty
What are market-based supply side policies?
Policies which are designed to remove anything that prevents the free market working efficiently
What are examples of market based supply side policies?
Privatisation, deregulation, income tax cuts,reduced welfare benefits, flexible labour markets)
What are interventionist supply-side policies?
Policies designed to correct market failure
What are some examples of interventionist supply-side policies?
Education, training, housing supply, investment into the public sector
What incentives can be used to increase the size of the workforce?
Reduction in benefits/taxes, prevent unemployment trap, free childcare, removal of a minimum wage ( incentivises firms to employ )
How can the government increase incentives for risk taking?
Lower taxes, so lower risk and bigger return on investment
What are the problems with government trying to encourage incentive to work?
If changes are small/offers not useful, will have little impact on incentivising work
How can the government use supply-side policy to promote competition?
Deregulation/Privatisation increases competition, competition policy makes cartels illegal
What are the issues with the government using supply-side policies to promote competition?
Quality of service may decrease as government constricting firms growth
What supply-side policies can the government use to reform the labour market?
Increase the retirement age, increase flexibility of labour market ( weaken trade unions, improve mobility of labour by providing affordable housing and advertising of job vacancies), scrap minimum wage to increase employment, reduction of benefits
What could be a potential issue with the government scrapping/reducing the minimum wage as a supply-side policy?
May lead to the unemployment trap, where wages are so low that people would rather stay unemployed
What are some of the issues with the government reforming the labour market as a supply-side policy?
Can worsen inequality, poorer have larger MPC so reducing their income may reduce AD
How could the government improve skills/quality of the labour force?
Increase spending on education/training, increase regulation (to force training), allow high skilled migrants, increase efficiency
What are some of the issues with the government trying to improve the skill/quality of the labour force as a supply side policy?
Opportunity cost, time-lag, investment may be done poorly and not benefit supply
How would the government improve infrastructure, and what would the impact of this be?
Government spending, can use improved technology which increases efficiency - firms benefit from external EoS, improved geographical mobility
What are some of the problems of the government improving infrastructure as a supply side policy?
Worsens debt, can be a long-time, expensive to build
What are the overall benefits of supply side policies?
Able to increase output and decrease prices, more sustainable in the long term , improve BoP as exports more efficient
How does Keynesian LRAS argue against the use of supply-side policies?
Shows that they have no impact when LRAS is elastic - demand - side policies must be used as supply is already available
What are some of the overall negative impacts of the use of supply-side policies?
Not guaranteed success, can lead to a budget deficit if spending is on them, can cause inflation and unemployment, little impact in the short-term
Issues with using expansionary policies?
Increases inflation, worsens the BoP
Issues with using contractionary policies?
Increases unemployment, decreases economic growth
Issues with rising interest rates ?
Can damage long-term investment as less incentive to invest, distribution of wealth worsens as richer/older people generally have more savings, competitiveness of exports worsens as value of the £ strengthens
Issues with lowering interest rates
Inequality increases as rich have more assets
Issues with using supply-side policies
May increase inflation in the short-term, worsens workers rights, damage environmental issues
Evaluation of expansionary fiscal/monetary policies
Output gap size, nature of growth, policy used
Evaluation of contractionary fiscal/monetary policies
Output gap size (only useful in positive output gap), Laffer curve ideas, policy used
Evaluation of supply-side policies
LR/SR, in recession not useful, worsens deficit, income inequality, environment