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Macroeconomics > Macroeconomic objectives + policies > Flashcards

Macroeconomic objectives + policies Flashcards

1
Q

what are monetary policy committee

A

responsible for the base interest rate and quantitative easing

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2
Q

what is the base rate

A

the base rate of interest which the BoE charges banks to borrow money overnight. influences other rates - saving, bank loan

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3
Q

what are monetary policies

A

involves using interest rates and quantitative easing to influence the levels of consumer spending and AD

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4
Q

what are expansionary monetary policies

A

a reduction in interest rates and/or an increase in the supply money and credit in an economy is called expansionary monetary policy or a reflationary monetary policy

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5
Q

what are contractionary monetary policies

A

an increase in interest rates and/or attempts to control or reduce the supply of money and credit is called a contractionary monetary policy or a deflationary monetary policy

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6
Q

how does quantitative easing work

A
  1. the monetary policy committee in the BoE digitally creates money
  2. the MPC uses this to buy government bonds from private institutions
  3. banks receive a large sum of cash in exchange for their bonds
  4. banks will then use this money to loan to households and firms to stimulate consumption and investment
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7
Q

what do the impact of quantitative easing on government bonds

A

^price and v yield of bond

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8
Q

what impacts cost of borrowing for households and firms in quantitive easing

A

interest rates on government bonds

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9
Q

what are the the problems with quantitative easing

A
  1. could increase rate of inflation
  2. low consumer + business confidence
  3. banks do not loan money out due to low confidence
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10
Q

why use quantitative easing

A
  • ^C + ^I
  • ^injections into CFoI
    due to:
    • v confidence
    • v disposable income
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11
Q

what is fiscal policy

A

describes the decisions that the governments make about spending and taxation

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12
Q

what is expansionary fiscal policy

A

when the government introduces policies like reducing income tax or increases government spending

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13
Q

what is contractionary fiscal policy

A

when the government increases the taxes or decreases government spending

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14
Q

what does fiscal policy include that G doesn’t

A

transfer payments

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15
Q

what is a direct tax

A

a tax, such as income tax, which is charged on the income or profits of the person who pays it, rather than on goods or services.

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16
Q

what is an indirect tax

A

an indirect tax is collected by one entity in the supply chain, such as a manufacturer or retailer, and paid to the government; however, the tax is passed onto the consumer by the manufacturer or retailer as part of the purchase price of a good or service. the consumer is ultimately paying the tax by paying more for the product.

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17
Q

what is income

A

money received, especially on a regular basis, for work or through investments

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18
Q

what is wealth

A

wealth is an accumulation of valuable economic resources that can be measured in terms of either real goods or money value.

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19
Q

what is occupational immobility of labour

A
  • not having the skills to work a particular job or being under-employed
  • job doesn’t utilise your skills or work fewer hours than you want
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20
Q

what is geographical immobility of labour

A
  • labour can’t get the jobs they want due to factors preventing you from moving
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21
Q

what is an interventionist policy

A

government involvement increases

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22
Q

what is a free-market policy

A

government involvement reduces

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23
Q

what are supply side policies

A
  • intervenes in a market
  • increase LRAS (productive potential)
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24
Q

what is the impact of trade unions

A
  • increase power to strike
  • firms have to increase wages to keep workers
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25
Q

what does increasing privatisation do

A

increase competition

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26
Q

what does reducing bureaucracy do

A

makes it easier to start businesses

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27
Q

what is a zero hour contract

A

a zero-hour contract is a type of employment contract between an employer and an employee whereby the employer is not obliged to provide any minimum number of working hours to the employee

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28
Q

define inflation

A

increase in the average prices across the economy over a given time period

29
Q

define disinflation

A

the level of inflation is falling - meaning that prices are rising, but rising more slowly

30
Q

what is cost push inflation

A

inflation may be initiated in the supply side of the macroeconomy

31
Q

what is the hedging evaluation for cost-push inflation

A
  • a hedging contract is an agreement between a firm and their supplier to purchase the food at a fixed price for a certain time
  • cost-push inflation is delayed until the contract ends (unwinding) and then the rate of inflation will be impacted
32
Q

what is demand-pull inflation

A

increase in price level initiated by an increase in AD

33
Q

evaluation of demand-pull inflation

A

the inflation will be impacted more if the new equilibrium output is closer to full employment level. it will be less impactful if there is spare capacity

34
Q

define deflation

A

decrease in price of goods and services over time

35
Q

how is the rate of inflation calculated

A
  • measured by CPI and RPI
  • a representative basket of goods and services is used and weights are attached to each item basked in the items importance in peoples expenditure
  • measures change in price of the the basket
36
Q

what are the three different measures of inflation

A
  1. CPI
  2. Core Inflation
  3. RPI
37
Q

what is CPI

A

consumer price index - the ONS measures the changes in price of goods and services included in the basket of goods and services. this then helps to calculate the change in inflation on a yearly period

38
Q

what is core inflation

A

this seeks to strip away volatile factors such as food and commodity prices. this included a smaller basket of goods. it may be more accurate in showing underlying inflation

39
Q

what is RPI

A

it includes more factors such as mortgage interest payments, council tax and other housing costs not in CPI. RPI tends to be more volatile than CPI. changes in interest rates impact RPI

40
Q

what is the official measure of inflation

A

CPI

41
Q

what are the 5 limitations of CPI

A
  1. not fully representative
  2. spending patterns
  3. housing costs
  4. changing quality of goods and services
  5. new products
42
Q

how is not being fully representative a limitation of CPI

A

it will be inaccurate for the ‘non-typical’ household

43
Q

how are spending patterns a limitation of CPI

A

not everyone has the same needs to accommodate for

44
Q

how are housing costs a limitation of CPI

A

the ‘housing’ category of CPI measures changes in the costs or rents, property and insurance repairs. it accounts for around 16% of the index. housing costs vary from person to person

45
Q

how is changing quality of good or service a limitation of CPI

A

although the price of a good or service may rise, this may also be accompanied by an improvement in quality of a product

46
Q

how are new products a limitation of CPI

A

the CPI is quite slow to respond to emergence of many new products and services

47
Q

what is a wage-price spiral

A

this is both a cause and effect of inflation. inflation expectation leads to a demand for higher wages that increase labour costs and costs of production and therefore the prices of the goods produced

48
Q

causes of demand-pull inflation

A

anything that increases any component of AD
eg
- QE
- decrease in income tax
- expenditure from G
- increase in value of exports
- inflation expectations

49
Q

causes of cost-push inflation

A

anything that increase SRAS
eg
- monopolies
- devaluation/depreciation of currency
- natural disaster
- higher wages
- increase trade union power

50
Q

effect of inflation on consumers

A
  • reducing purchasing power of consumers
  • loss of real income in comparison to rate of inflation
  • higher interest rates on loans and mortgages
51
Q

effect of inflation on firms

A
  • hard to maintain profit margin
  • less consumer spending, lower business sales
  • increase costs of resources
52
Q

effect of inflation on government

A
  • rising government borrowing costs
  • raise nominal GDP and lower the public sector net debt to GDP ratio
53
Q

effect of inflation on workers

A
  • inflation has a greater cost-of-living impact on lower-income earners
  • this is because they spend most of their disposable income on essential goods and services, which generally experience greater price increases than non-essential items
54
Q

what is a floating exchange rate

A

set by the market through supply and demand for that particular currency relative to other currencies, without any intervention by control borders or government

55
Q

what influences a floating exchange rate

A
  1. imports and exports
  2. interest rates
  3. foreign direct investment flows
  4. speculation
56
Q

what is a fixed exchange rate

A

where a currency has a fixed value against another currency or commodity

57
Q

what are some examples of a fixed exchange rate

A
  • Danish Krone : Euro
  • Yuan : US Dollar
  • gold standard
58
Q

what does appreciation change to with a fixed exchange rate

A

revaluation

59
Q

what does deppreciation change to with a fixed exchange rate

A

devaluation

60
Q

what is a managed exchange rate

A

the government and central bank can also play some part in determining the exchange rate of the currency

61
Q

how do government and central banks impact exchange rates

A
  • intervening directly and buying/selling the currency. this is achieved by using the foreign currency reserves
  • intervening indirectly, for example by raising or lowering interest rates (hot money flows) which then influence the market demand and supply of the he currncy
62
Q

how do imports impact the demand and supply of currencies

A

to purchase foreign goods, the UK need to first buy foreign currencies so have to sell pounds. this increases the supply of the pound

63
Q

how do exports impact the demand and supply of currencies

A

in order for foreigners to purchase our exports, they need to purchase the pound. this increases the demand for the pound

64
Q

how do interest rates impact the demand and supply of currencies

A

hot money flows:
1. central bank raises interest rates
2. commercial banks increase the interest rates on their savings accounts
3. the reward for saving in that country’s banks increases
4. foreign investors want to save in that country to get a better rate of return on their savings
5. they sell their currency to buy the other one to save in their banks
6. demand for that currency increases

65
Q

how do flows of FDI impact the demand and supply of currencies

A
  • if there is an inflow of funds for investment in the country, again demand for their currencies rise
  • this is because investors will buy the company in their currency
66
Q

how does speculation impact the demand and supply of currencies

A
  • speculation is the single most important factor which determines the minute by munger value of a currency
  • if speculators believe that the value of a currency is going to fall against another. they will sell and buy the currencies. therefore, an increase in supply and demand
67
Q

what is a semi-fixed exchange rate

A

when there are upper and lower bounds for the exchange rate to move freely within

68
Q

define depreciation

A

fall in the value of a currency relative to other currencies

69
Q

define appreciation

A

rise in the value of a currency relative to other currencies

Macroeconomics (12 decks)

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