Macroeconomic Policy Flashcards
What are the main objectives for governments economic policy?
Economic growth - high and sustainable
Inflation - stable and low
Unemployment - full and maintained
Balance of payments - equilibrium or surplus
How is economic growth measured in the U.K.?
The percentage rate of change in REAL GDP
What does per capita mean?
Per person
Why is using the term per capital useful?
Shows average income and indicates economic prosperity overtime
What are the limitations of GDP as a measure of economic performance?
Doesn't show: Distribution of income Voluntary sector Wellbeing Productivity Sustainability The composition of GDP
HIDDEN ECONOMY
Trade off between:
Economic growth and inflation
Unemployment falls Wages increase Consumer spending increases Demand increases Price increases (inflation)
Trade off between:
Economic growth and the current account
Economic growth increases
Consumer spending increases
Increased imports
Current account deficit worsens
Trade off between:
Balance of payments and inflation
As inflation increases
Exports become less competitive
Reduced exports
Definition of Real GDP?
Value of GDP adjusted for inflation
Definition of Nominal GDP?
Real FDP is the value of GDP measured at current prices (not adjusted for inflation)
What does real GDP Per Capita measure?
Average output per person in an economy
What does the Consumer Price Index measure?
Households purchasing power
How do you measure inflation in the U.K.?
CPI (officially)
RPI (unofficially)
How does CPI work?
600 goods are included
Weighted according to amount of income spent on them
How is RPI different to CPI?
Includes housing costs (payments on mortgage interest and council tax)
How do you measure unemployment?
The Claimant Count
International Labour Organisation and the UK Labour force survey
Definition of productivity?
Output per worker per period of time
How does the claimant count work?
Counts no of people claiming unemployment benefits such as JSA
What is the balance of payments?
A record of all financial transactions made between consumers firms and the government from one countries to another
How much is spent on imports
The value of exports
Describe imports?
Goods and services bought from other countries
Negative on balance of payments
Outdlow of money
Describe exports?
The goods and services sold to another country
Positive on the balance of payments
Inflow of money
What is unemployment?
People who are actively seeking employment but unemployed
Describe frictional unemployment?
Short term
Workers switch between jobs
Occurs when economy is strong
People feel confident about their ability to get a job in the future
Reduced by increased labour mobility and incentive to work
Increasing number of job centres and reducing benefits
Describe structural unemployment?
Long term
Lack of demand for the skills that a group of workers offer
Associated with changing structure of economy
Reduced through education and training (new skills and reducing occupational immobility)
Describe cyclical unemployment?
Fall in AS in economic
Associated with a. Recession
Solved by shifting AD right
Demand management policies e.g. Increasing government spending, lowering tax and interest
When does real wage unemployment occur?
When wages in the economy are above equilibrium
Due to minimum wage or laws
When can deflation be good? (benign deflation)
As prices fall
Exports increase
As prices are more competitive
Balance of payments surplus
When can deflation be dangerous?
People think prices will drop
So delay spending (as they think it’ll be cheaper later)
AD shifts inward
Causing a fall in economic growth
Rise in unemployment as people save more, fewer jobs made and incomes decrease
What is the overall aim of supply side policies?
Improving the long run productive potential if he economy
List the functions of supply side policies?
Increase incentives Promote competition Reform the labour market Improve the skills and quality of the labour force Improve infrastructure
How do governments increase incentives through supply side policies?
Governments could reduce and cooperation gax to encourage spending and investment
How do governments promote competition through supply side policies?
By deregulating or privatising the public sector
Firms can compete in a competitive market
Which helps economic efficiency
How do governments improve the skills and quality of the labour force through supply side policies?
Subsides training or spend more on education
Lowers costs for firms
Since they have to train fewer workers
Improves the quality of labour force
Contributes towards higher productivity
What type of unemployment do supply side policies deal with?
Structural
What do demand side policies deal with?
Cyclical
What is fiscal policy?
How governments raise revenue or incomr through taxation and spend/expenditure
What is a fiscal policy instruments?
Government spending and taxation
Government could influence the size of the circular flow by changing the government budget and spending and taxes can be targeted in area which need stimulating
What does fiscal policy aim to do?
Stimulate economic growth and stabilise the economy
What is the problem with fiscal policy?
This creates debt which has a negative effect because the larger the loans, the more had to be paid back with interest
Describe monetary policy?
Interest rates
Quantative easing
By the Bank of England
Describe contractory monetary policy?
Involved decreasing the supply of money resulting in a controlled reduction of real GDP
But will eventually result in higher and more sustainable economic growth
When is quantative easing done?
As interest rates can’t be lowered much more than 0.5%
what does monetary policy primarily effect
AD
what does fiscal policy primarily affect
supply
and
demand
what does lowering interest rates do
decreases cost of borrowing and encourages people to spend and invest
increased AD
reduces demand deficient unemployment
reduces exchange rate
makes exports more interesting
when won’t fiscal or monetary policy work
confidence is low
problems of lowering tax
inflation depending on stage in cycle
government borrow to cover cost
policy trade off
policies to reduce unemployment
monetary policy - demand fiscal policy - supply and demand lower minimum wage subsidies to encourage investment education and training - structural - flexible labour markets (easier to hire and fire)
what does fiscal policy depend on
initial level of economic activity
size of multiplier
length of time lag
negatives of fiscal policy
demand pull inflation
disincentive effects
time lag
financing the polciy
impacts of fiscal policy
short run stimulates AD
long run stimulates AS (through investment)
benefits of social polciy
fiscal policy can affect C I and G
dual effects both SRAS and LRSS
what does monetary policy involve
reduction in interest rates
increase in money supply
why are monetary policies used
central banks
target inflation using exchange rates money supply and exchange rate
what does reducing interest rates do
interest rates reduce the cost of borrowing
reduce the rate of return on saving
policy to reduce demand pull inflation
contractionsru monetary or fiscal policy
government spending down
tax up
raised inter st rates
lower money supply
in the short term what does contractionary fiscal policy lead to
increased unemployment
