Macroeconomic policies Flashcards
What are the three main types of macroeconomic policy instruments?
- fiscal policy
- monetary policy
- supply-side policies
Define fiscal policy.
decisions made by government on its expenditure, taxation and borrowing
How will the aggregate demand curve move if government increases expenditure?
Shift to right
What will be the effect on inflation if the government increases expenditure?
increases (as AD curve moves right so average price level increases)
What will be the likely effect on the current account of the balance of payments if the government increases expenditure?
Some of increase in aggregate demand will be spent on imports so likely to be increase in current account deficit (or reduction in current account surplus).
When does a government budget deficit arise?
when government revenue is less than government expenditure
How does UK government borrow?
by issuing Treasury bills or gilt-edged securities
What was the effect of Covid-19 on UK government borrowing?
Increased borrowing (as higher government spending, eg furlough payments, Nightingale Hospitals, and lower taxation eg lower leisure spending)
Give two examples of UK direct taxes.
- income tax
- national insurance
Give two examples of UK indirect taxes.
- VAT
- excise duties
Is UK income tax a progressive or regressive tax?
Progressive (ie higher % generally paid by those with higher incomes)
Is UK VAT a progressive or regressive tax?
Regressive (ie higher % generally paid by those with lower incomes, as higher paid spend lower % and save rest)
Why do cigarettes have high excise duties?
Market failure: significant negative externalities, eg secondary smoke, NHS costs, so aim to reduce demand below market equilibrium
Why does petrol have high excise duties?
Market failure: significant negative externalities eg pollution, greenhouse gases, so aim to reduce demand below market equilibrium
Define monetary policy.
decisions made by government about monetary variables eg money supply and interest rates
What is the opportunity cost of holding money?
interest rate
What effect will higher interest rates have on aggregate demand?
It reduces, as less investment expenditure and household consumption (as either choose to save or to not borrow)
Name the UK’s central bank.
Bank of England
State three functions of a central bank.
- issuing coins and banknotes
- acting as banker to commercial banks
- regulating financial system
What is the Monetary Policy Committee (MPC)?
the body within the Bank of England responsible for conduct of monetary policy, in particular setting interest rates to keep inflation within 1% pa of the 2% pa inflation target
What is the Bank Rate?
interest rate paid by Bank of England on commercial bank reserves, set by MPC to influence inflation
If the Bank Rate increases, what is likely to happen to mortgage interest rates?
also increase
Define transmission mechanism of monetary policy
process by which a change in Bank Rate affects inflation
Define quantitative easing.
process by which liquidity in economy is increased when Bank of England purchases assets from banks