Macroeconomic policies Flashcards
What are the 3 main economic policies?
Fiscal
Monetary
Supply-side
What is the fiscal policy?
Taxation and spending decisions of a government
What is reflationary fiscal policy?
Wants to increase AD
What is deflationary fiscal policy?
Wants to decrease AD
What is the monetary policy?
Decisions on the rate of interest, money supply and exchange rate
What is the supply-side policy?
Gov attempts to increase productivity and shift AS curve to the right, by improving the quality and quantity of the 4 factors of production
3 components to the budget?
Expenditure
Receipts
Borrowing Requirement
What is a good tax?
Generates revenue
Works in the way intended
Avoids undesirable side effects
3 types of government expenditure?
Capital expenditure
Current expenditure
Transfer payments
What is capital expenditure?
Improving capital stock of country
What is current expenditure?
Running public services
What are transfer payments?
Benefits
3 approaches to taxation?
Progressive
Proportional
Regressive
What is progressive tax?
Taxes rise as incomes rise
What is proportional tax?
Everyone pays the same tax
What is regressive tax?
Individuals taxes fall as their incomes rise
What are the 2 types of taxes?
Direct
Indirect
What is direct tax?
Levied on income of person who pays it
What is indirect tax?
Levied on goods and services
3 types of government budget position
Budget deficit
Budget surplus
Balanced budget
What do budget deficits aim to do?
They are expansionary- increase AD
What does budget surplus’ aim to do?
They are deflationary- reduce AD
What does a balanced budget aim to do?
It is neutral fiscal- not influencing AD
Why does the gov operate budget deficits?
Cyclical- respond to economic cycle
Structural- deficit when economy at full employment
What is a structural deficit?
Not related to the state of the economy
What is a cyclical fiscal balance?
Influenced by the state of the economy
What is it called when you choose to deliberately run a deficit?
Structural deficit
Why might the gov run a cyclical deficit?
Tax revenues much lower
Spending is much higher
What are automatic fiscal stabilisers?
In a recession, tax revenue falls but increased gov spending on benefits- stabilises economy
What is a debt
Constant
Money you pay back
What is a deficit
Current
3 ways to solve deficit?
Increase tax levels
Austerity
Boost economic growth
What is crowding out?
Strategy of fiscal policy to stimulate AD may not be effective
2 common fiscal rules
Total gov debt no more than 60% of GDP
Gov deficit no more than 3% of GDP
What are interest rates?
Main tool of monetary policy- the price we pay to borrow money
What is quantitative easing?
Adopting a loose monetary policy to stimulate AD- increases money supply in economy
What is an increase in interest rates called?
Deflationary monetary policy
What is a decrease in interest rates called
Expansionary monetary policy
What does increasing interest rates cause
Reduced:
Investment
Consumption
Exports-imports
What does a decrease in interest rates cause?
Increased:
Investment
Consumption
Exports-imports
What is hot money?
Businesses and investors moving money around the world for the best return
What are exchange rates?
The price of one country’s currency in terms of another country’s currency
What do free market supply side policies do?
Increase competitiveness
What do interventionist supply side policies do?
Gov intervention to overcome market failure
Examples of free market policies
Privatisation
Deregulation
Reducing unemployment benefits
Deregulate labour markets
Examples of interventionist policies?
Increased education and training
Improving infrastructure and transport
Improved healthcare
What does life stand for
Labour
Industry
Finance
Enterprise
What does epic stand for?
Efficiency
Productivity
Incentives
Competition
Economic growth vs inflation
We want high growth and low inflation but they inflict each other
Economic growth vs current account
More spending on imports when economic growth is high- this worsens current account deficit
Economic growth vs government budget deficit
Reducing the budget deficit requires less expenditure- fall in AD
Economic growth vs environment
Pollution due to more manufacture
Economic growth vs inequality
Better off people are able to take advantage of more opportunities
Unemployment vs inflation
Economic growth increases, unemployment falls, but wages increase - real wage inflation
Environment vs competitiveness
“Green taxes” could compromise competitiveness of firms- limited in production
Progressive taxes vs inflation
Taxes to reduce inequality could cause higher rates of inflation
Fiscal vs monetary policy
Expansionary fiscal policies, could mean more government borrowing, rising interest rates and inflation
Interest rates vs inequality
Low interest rate could affect distribution of income
Transition mechanism
Interest rates —> borrowing of individuals and firms
Individuals—> credit and loans = consumption
Firms—> new loans = investment
Existing loans—> costs —> margins and employment = consumption
expansionary monetary policy is most likely to
shift the AD curve right
a rise in the level of domestic investment will most likely result from a rise in…
company profits
a large rise in interest rates are most likely to increase….
unemployment
