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.
