Macroeconomic policies Flashcards
Fiscal, Monetary, Supply-side, Exchange rate, Interest, Inflation, Taxation.
What is fiscal policy?
The government’s use of taxation and government spending to impact the economy.
What can fiscal policy be used for?
To increase / reduce the circular flow of money.
How can fiscal policy increase / reduce the circular flow of money?
Tax changes will effect leakages and government spending will impact injections. (Depending on increases or decreases)
What is an expansionary policy?
When government expenditure is greater than tax revenue causing a net injection.
How would fiscal policy be used to increase the circular flow of income?
Increases in government spending would provide an injection into the flow. A cut in taxes would provide people with more disposable income.
What is contractionary policy?
When the economy shows signs of overheating such as rising inflation, the government will take action to create a net leakage. Taking money out of the flow would reduce aggregate demand, there would be a time lag before people change their spending but it will eventually fall.
What is monetary policy?
Altering base interest rates or using quantitiative easing.
What does monetary policy do?
Determines all other interest rates in the economy, or alters the quantity of money in the economy.
What is the MPC’s inflation target?
2%
Who sets the interest base rate in the economy?
The MPC.
Who uses the interest base rate?
The Bank of England.
How does The Bank of England use base rates?
They will charge moneymarkets for short term loans to other banks or financial institutions.
What other rates are likely to change with the base rate?
Most other rates of interest in the economy such as mortgases, credit card rates, and loans.
How long does it take for an interest rate change to affect inflation?
Two years.
Why are interest rates set?
So that the inflation target can be met in the future.
How is household demand affected by interst rates?
Interest rates will determine when to / how much is put into savings which indirectly affects spending.
How is consumer and business confidence affected by interest rates?
Lower interest rates will increase consumer spending, increasing business and consumer confidence; higher interest rates causes consumers to save instead of spend therefore, consumer and business confidence will fall.
How can interest rates impact shareholders?
A fall in rates will increase the profitability of businesses as consumer spending increases; this may cause firms to pay higher dividends to shareholders.
What are some of the factors which the Bank of England considers when setting interest rates?
GDP growth.
Bank lending and consumer credit figures.
Growth of wages.
Average earnings.
Labour costs.
Unemployment figures.
International data.
Why does the Bank of England consider consumer anf business confidence when setting interest rates?
This can provide an ‘advance warning’ to turning points in the economic cycle.
Why does the Bank of England consider growth of wages, average earnings and labour costs when setting interest rates?
Wage inflation may be a cause of cost-push inflation.
Why does the Bank of England consider unemployment figures when setting inerest rates?
Low interest will promote investment which can lead to job creation in times of high unemployment.
Why does the Bank of England consider trends in global foreign exchange markets when setting interest rates?
A weaker exchange rate increases the prices of imports which can threaten inflation.
What does changes in interest rates affect?
The housing market.
Disposable income.
Consumer demand for credit.
Business capital investment.
Consumer and business confidence.
Trends in savings.
Are UK consumers highly interest rate elastic or inelastic?
Elastic.
Is the MPC independant from the government?
Yes.
How often can interest rates be changed?
On a monthly basis.
How long does it take for the effects of interest rate changes to be experienced?
Up to a year, but the effect on confidence is often immediate.
How is supply side policies different to monetary and fiscal?
Supply side focuses on AS as opposed to AD.
What is the aim of supply side policies?
To reduce inflationary pressures through growth in the economy from increases in AS.
What are some ways supply side policies increase AS?
Privitisation.
Deregulation.
Improving market incentives.
Increasing productivity.
Competition.
What is the aim of exchange rate policy?
Used to help with the balance of payments.
What kind of exchange rate do we have?
Floating.
What are some negatives to policies?
They are susceptible to sudden change, unexpected consequences / actions.
There are time lags.
Globalisation has meant events in other countries affect our own economy e.g oil.
What is a trade off?
Similar to oppurtunity cost, the inbalanced effects of policies. e.g reducing inflation by reducting AD but AD must be increased in order to reduce unemployment.
What trade off is becoming increasingly ademant with increases in economic growth?
The large use of materials, resources, energy (finite) contribute to climate change which can affect every sector of employment.
What is the general public opinion on tax changes?
Most oppose paying more tax (new or increased) but are also against public sector cuts.
What is tax evasion?
Escaping paying taxes illegally.
What is tax avoidance?
Bending the rules of the tax system to gain tax advantages which were not intended.
What is the difference between tax evasion and tax avoidance?
Tax evasion is illegal and tax avoidance is not.
What does macroeconomic relate to?
The economy as a whole as opposed to an individual firm.
What are the macroeconomic objectives?
Economic growth.
Low unemployment.
Low and stable rate of inflation.
Balance of payments equillibrium.
What are the four macroeconomic policies?
Monetary policy.
Fiscal policy.
Exchange rate policy.
Supply-side policy.
What methods are there to control the money supply in the economy?
Print more money.
Influence Interest rates.
Engage in open market operations.
Introduce a quantitative easing program.
