Macroeconomic Objectives And Policies Flashcards by Sarah Johnson

4 macro economic objectives (4)

Strong economic growth
Low inflation - 2%
Equilibrium of BoP
Reduced unemployment - 3%

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What is full employment (2)

Everybody of working age who wants to work can
97%

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Labour creates what demand

Derived
Wages = increased demand for g/s

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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

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Definition of inflation

Sustained and general price level increase of goods and services in an economy

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Causes of inflation (2)

Demand pull
Cost push

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Causes of demand pull

Any increase components of AD

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Causes of cost push

Supply side

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Impact of inflation (5)

Increase unemployment
Shoe leather
Menu
Psychological + political
Hyperinflation

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Ways to measure inflation (2)

CPI
RPI - includes mortgage payments = higher always

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What is the balance of payments

Record of financial transactions between consumers, firms and government from one country to another

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Sections of current account (4)

Trade in goods - visible
Trade in services - invisible = insurance
Primary income
Secondary income

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What’s primary income

Flows of money in/out of country = investment

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What’s secondary income (3)

Movement of memory between countries
Not paying G/S or I
Payments to family abroad

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Fact about uk deficit

The uk has been in a deficit since 1980s + prior

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Consequence of deficit (3)

Increased unemployment
Domestic demand is reduced
Reduced economic growth

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Causes for deficit (2+)

SPICED = strong pound = cheaper imports
Economic growth = increased income = increased demand

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How to reduce deficit (2+)

Devaluation: Exchange rate through pegged sytem
Currency falls = WPIDEC
Deflation! Reduced price = domestic price cheap

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Fiscal policy involves (2)

Tax or government spending
Shifts AD

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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

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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