Macroeconomic objectives + policies Flashcards
what are monetary policy committee
responsible for the base interest rate and quantitative easing
what is the base rate
the base rate of interest which the BoE charges banks to borrow money overnight. influences other rates - saving, bank loan
what are monetary policies
involves using interest rates and quantitative easing to influence the levels of consumer spending and AD
what are expansionary monetary policies
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
what are contractionary monetary policies
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
how does quantitative easing work
- the monetary policy committee in the BoE digitally creates money
- the MPC uses this to buy government bonds from private institutions
- banks receive a large sum of cash in exchange for their bonds
- banks will then use this money to loan to households and firms to stimulate consumption and investment
what do the impact of quantitative easing on government bonds
^price and v yield of bond
what impacts cost of borrowing for households and firms in quantitive easing
interest rates on government bonds
what are the the problems with quantitative easing
- could increase rate of inflation
- low consumer + business confidence
- banks do not loan money out due to low confidence
why use quantitative easing
- ^C + ^I
- ^injections into CFoI
due to:- v confidence
- v disposable income
what is fiscal policy
describes the decisions that the governments make about spending and taxation
what is expansionary fiscal policy
when the government introduces policies like reducing income tax or increases government spending
what is contractionary fiscal policy
when the government increases the taxes or decreases government spending
what does fiscal policy include that G doesn’t
transfer payments
what is a direct tax
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.
what is an indirect tax
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.
what is income
money received, especially on a regular basis, for work or through investments
what is wealth
wealth is an accumulation of valuable economic resources that can be measured in terms of either real goods or money value.
what is occupational immobility of labour
- 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
what is geographical immobility of labour
- labour can’t get the jobs they want due to factors preventing you from moving
what is an interventionist policy
government involvement increases
what is a free-market policy
government involvement reduces
what are supply side policies
- intervenes in a market
- increase LRAS (productive potential)
what is the impact of trade unions
- increase power to strike
- firms have to increase wages to keep workers
what does increasing privatisation do
increase competition
what does reducing bureaucracy do
makes it easier to start businesses
what is a zero hour contract
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
define inflation
increase in the average prices across the economy over a given time period
define disinflation
the level of inflation is falling - meaning that prices are rising, but rising more slowly
what is cost push inflation
inflation may be initiated in the supply side of the macroeconomy
what is the hedging evaluation for cost-push inflation
- 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
what is demand-pull inflation
increase in price level initiated by an increase in AD
evaluation of demand-pull inflation
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
define deflation
decrease in price of goods and services over time
how is the rate of inflation calculated
- 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
what are the three different measures of inflation
- CPI
- Core Inflation
- RPI
what is CPI
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
what is core inflation
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
what is RPI
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
what is the official measure of inflation
CPI
what are the 5 limitations of CPI
- not fully representative
- spending patterns
- housing costs
- changing quality of goods and services
- new products
how is not being fully representative a limitation of CPI
it will be inaccurate for the ‘non-typical’ household
how are spending patterns a limitation of CPI
not everyone has the same needs to accommodate for
how are housing costs a limitation of CPI
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
how is changing quality of good or service a limitation of CPI
although the price of a good or service may rise, this may also be accompanied by an improvement in quality of a product
how are new products a limitation of CPI
the CPI is quite slow to respond to emergence of many new products and services
what is a wage-price spiral
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
causes of demand-pull inflation
anything that increases any component of AD
eg
- QE
- decrease in income tax
- expenditure from G
- increase in value of exports
- inflation expectations
causes of cost-push inflation
anything that increase SRAS
eg
- monopolies
- devaluation/depreciation of currency
- natural disaster
- higher wages
- increase trade union power
effect of inflation on consumers
- reducing purchasing power of consumers
- loss of real income in comparison to rate of inflation
- higher interest rates on loans and mortgages
effect of inflation on firms
- hard to maintain profit margin
- less consumer spending, lower business sales
- increase costs of resources
effect of inflation on government
- rising government borrowing costs
- raise nominal GDP and lower the public sector net debt to GDP ratio
effect of inflation on workers
- 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
what is a floating exchange rate
set by the market through supply and demand for that particular currency relative to other currencies, without any intervention by control borders or government
what influences a floating exchange rate
- imports and exports
- interest rates
- foreign direct investment flows
- speculation
what is a fixed exchange rate
where a currency has a fixed value against another currency or commodity
what are some examples of a fixed exchange rate
- Danish Krone : Euro
- Yuan : US Dollar
- gold standard
what does appreciation change to with a fixed exchange rate
revaluation
what does deppreciation change to with a fixed exchange rate
devaluation
what is a managed exchange rate
the government and central bank can also play some part in determining the exchange rate of the currency
how do government and central banks impact exchange rates
- 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
how do imports impact the demand and supply of currencies
to purchase foreign goods, the UK need to first buy foreign currencies so have to sell pounds. this increases the supply of the pound
how do exports impact the demand and supply of currencies
in order for foreigners to purchase our exports, they need to purchase the pound. this increases the demand for the pound
how do interest rates impact the demand and supply of currencies
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
how do flows of FDI impact the demand and supply of currencies
- 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
how does speculation impact the demand and supply of currencies
- 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
what is a semi-fixed exchange rate
when there are upper and lower bounds for the exchange rate to move freely within
define depreciation
fall in the value of a currency relative to other currencies
define appreciation
rise in the value of a currency relative to other currencies
