Macroeconomic Objectives And Policies Flashcards
4 macro economic objectives (4)
Strong economic growth
Low inflation - 2%
Equilibrium of BoP
Reduced unemployment - 3%
What is full employment (2)
Everybody of working age who wants to work can
97%
Labour creates what demand
Derived
Wages = increased demand for g/s
Supply side causes of unemployment (8+) THINK
Real wage above equilibrium - firms lay of workers
Seasonal - ski instructors
Technology - machines replace workers
Occupational immobility - lack of skills
Frictional - worker leaves one and is looking
Structural - whole industry closes - 1980s coal mines in UK
Regional - region deeply affected - wales had coal mines
Geographical immobility - work tied to specific area = family ties
Definition of inflation
Sustained and general price level increase of goods and services in an economy
Causes of inflation (2)
Demand pull
Cost push
Causes of demand pull
Any increase components of AD
Causes of cost push
Supply side
Impact of inflation (5)
Increase unemployment
Shoe leather
Menu
Psychological + political
Hyperinflation
Ways to measure inflation (2)
CPI
RPI - includes mortgage payments = higher always
What is the balance of payments
Record of financial transactions between consumers, firms and government from one country to another
Sections of current account (4)
Trade in goods - visible
Trade in services - invisible = insurance
Primary income
Secondary income
What’s primary income
Flows of money in/out of country = investment
What’s secondary income (3)
Movement of memory between countries
Not paying G/S or I
Payments to family abroad
Fact about uk deficit
The uk has been in a deficit since 1980s + prior
Consequence of deficit (3)
Increased unemployment
Domestic demand is reduced
Reduced economic growth
Causes for deficit (2+)
SPICED = strong pound = cheaper imports
Economic growth = increased income = increased demand
How to reduce deficit (2+)
Devaluation: Exchange rate through pegged sytem
Currency falls = WPIDEC
Deflation! Reduced price = domestic price cheap
Fiscal policy involves (2)
Tax or government spending
Shifts AD
Positives of fiscal policy example (4)
Reduce VAT = increase Y
AD rises
Firms want to profit extra business = employ = EG = +K effect
2 objectives achieved = employment and EG
Negatives of fiscal policy (3+)
AD rising = inflation = recession
Price increase and demand reduces
Firms reduce costs = unemployment
Conclusion of fiscal policy (2)
Reduces chance of recession = kickstarts economy
Stimulates economy quick and easy
Monetary policy what it involves (3)
IR - long term
Money supply
Exchange rates
What does supply side policy involve (2)
Influences AS
E.G - Subsidies
What does supply side policy do + example
Encourage competition through privatisation and deregulation
What is privatisation (2)
Gov owned businesses sold to private sector
Firms who move have to be efficient to compete
Example of privatisation (2(
Post office 2022
BT + communications industry
Another important example of Suplly side - employment (2)
Reduce employment benefits = incentive to return to work force
Current CAP = 26000
Why SS good (3)
Fewer conflicts
Reduces cost push inflation = efficient
Long term solution
Why SS bad
Unpopular = welfare benefits
Definition of exchange rate
Price of currency in terms of another country
Main trading partners of uk (4)
Japan
USA
China
Europe
What fixed exchange rate (2)
Gov or central bank set it
China has there’s pegged to USA
What’s free exchange rate (2)
Moves with changing S/D for currency
Mexico, Australia, UK
Why is a weak pound good - WPIDEC (4+)
Exports cheaper
Domestic goods increase competitiveness
BOP deficit reduces = EG = employment
Increased tourism = uk is service based economy = kings coronation
Why is weak pound bad - WPIDEC (3)
Demand pull inflation
Cost push = uk is import nation
Overheat = recession = neg output gap
How does gov intervene indirectly to change pound (3)
Increase IR = strong pound = speculators invest in uk banks
Why does a import nation (UK) want WPIDEC (3+) + bad
Reduced AD for expensive imports
Increase demand for domestic goods = increase output = exports increase and EG
However… if inelastic = cost push inflation
What Big Mac index (2)
Measures internal AD
Big Mac exists worldwide in standard size so easily compare prices
Using GDP to measure ER problem (3)
ER more volatile day to day - not acc rep
Overestimate cost of living in poorer countries
ER more relevant to traded goods
What is PPP (2)
Purchasing power parity
Basket of goods
Reason for fluctuating ER (2)
Reduced IR
Other countries ER fluctuating
What contractionary policy - fiscal (2+)
Reduce GS = reduce employment = reduce income = reduced AD
Increase tax = reduce Y = reduced AD
What contractionary policy monetary
Increase IR = encourage saving
When is a contractionary policy used
When the economy is overheating
Tightening
Expansionary policy - fiscal (2)
Increase GS on public goods/services
Reduce tax
Expansionary policy - monetary (3)
Reduce IR = encourage borrowing = increased AD
What is quantative easing - type
Expansionary monetary policy
What is quantitative easing (3+)
Gov sells bonds
In return: receive interest each year + get money back at end of bonds life
Gov puts money into BoE = commercial banks = loans = increased AD
Example of quantitative easing (3)
Introduced in 2008 to kickstart economy
Financial crisis = low investment and interest rates = 0.1 to 0.001% = historic low
Gov pumped £895bn = 3 attempts = first was 75bn
Why no inflation 2008 - QE (2)
Already in period of deflation
Digital transaction so no physical money = can’t be spent just in balance sheet
Why financial crisis in 2008 (2)
American banks lent money to people who couldn’t pay loans back = short term profit
Large scale unemployment
