Macroeconomic policy and Objectives Flashcards
What is Macroeconomics?
Studies the behavior of the economy as a whole
What are the Key objectives of macroeconomic policy ?
- Price stability (inflation of 2%)
- growth of real GDP/ national output
- Rising employment
- higher average living standards
- Stable BoP
- Equitable distribution of wealth
- Balancing the fiscal budget
- Better regional balance of wealth
- Improved public services access
- improved competitiveness
- Environmental sustainability
What are bond yields?
The rate of interest pain on government debt
What is a cyclical fiscal deficit?
When a government is running a deficit due to being at different places in the trade cycle (boom/recession)
What is Fiscal policy?
Government policies that involve spending and taxation measures to help guide the economy
What is indirect taxation?
The levying of tax on goods and services rather then on wealth and profits e.g. VAT
What is the National debt?
The amount of money owed by the government which has accumulated over time.
What is a structural fiscal deficit?
The part of a deficit which is not related to the economy, it will not disappear even once the economy recovers
What is Government spending?
Spending by the public sector on goods and services, like education, healthcare and defense.
What is the public sector??
Businesses that are owned and operated by the government. there are 5.7 million (18.8% of employment) working in the public sector, 1.5 million in the NHS alone
What is Capital spending?
Spending on providing public services:
- Salaries of NHS workers
- Healthcare drugs
- Road maintenance
- Army logistical supplies
What is capital spending?
Spending on new public infrastructure:
- New motorways
- New NHS equipment
- Flood defence schemes
- Additional defence spending
What economic benefits does investing in Education bring?
May increase the productivity of workers
improvement in human capital and reduces structural unemployment
More innovation and competitiveness
What are the potential negatives of investing in education?
Effectiveness of education spending has been questioned
Money might be better spent on targeting other age groups or demographics opportunity costs
May be a lag
What are the benefits of additional healthcare spending ?
Improved health will boost the active labour force
Will increase productivity
Lessens risk of relative poverty
What are the drawbacks of additional healthcare spending ?
Better health results can be achieved with other policies that don’t involve increased spending
Lower income families may not get the improved access to improved facilities/ technologies.
What is progressive tax?
When the Marginal rate of tax rises as incomes also rise
What is a proportional tax?
When the tax rate is equal, no matter the income e.g. national insurance contributions
What is a regressive tax?
When the rate of marginal tax falls as incomes rise e.g. Excise duties on tobacco and alcohol
What is expansionary fiscal policy?
Fiscal policy targeted at reaching growth
What are some examples of expansionary fiscal policy?
- Cut in Income tax
- Cut in VAT
- Cut in corporation tax
- Cut in tax on interest from saving
What are the effects of a lower corporation tax?
Businesses get to keep a larger portion of their porfitst
the increase in post tax profits could lead to an increase in planned investment
this investment can be from both domestic and foreign businesses
Increased capital spending is an injection into the circular flow
creates a multiplier effect on demand, output and employment
What are some evaluative points on the effect of reducing corporation tax?
Effects depends on scale of tax cut
many factors affect capital investment
There will be a lag time between when tax is lowered and when investments begin
Extra investment may lead to a loss of jobs through capital assets, the Labour substitution effect occurs
What are the benefits of a high taxation economy?
Taxation helps balance the distribution of welath and income, it can be equitably be distributed by the government
Tax cuts don’t necessarily increase income for the government
Many countries with high taxation rates like Scandinavia are very economically successful
Taxes are needed to fund high quality public services and products
What are the justifications for government borrowing?
A rise in borrowing to increase G can powerfully affect AD
a higher fiscal deficit is often needed to lift AD out of a recession this can in turn then reduce the fiscal deficit, depending on the multiplier
interest rates are often low on government loans
What are the main drawbacks for public debt (more borrowing)?
High deficits cause interest payments to rise
The paying of interest rates has a burden on opportunity costs
An increase in national debt will likely create higher taxes in the future
The rising burdens may fall on future generations
What is Monetary policy?
Any policy related to interest rates, the money supply, exchange rate, it is led by the central bank
What are supply side policies?
Any policy intending to increase the productive potential output of a economy (Shift LRAS outwards) by increasing the quantity or quality of the factors of production
What are interventionist policies?
Economic interventionism, sometimes also called state interventionism, is an economic policy position favouring government intervention in the market process to correct market failures and promote the general welfare of the people.
What are free market economic policies?
A policy where buyers and sellers privately transact their business without any obstructed competition.
What are some examples of free market supply side policies?
Reduce income tax (incentivise longer hours and economic activity)
Reduce corporation tax
Deregulate industries to lower entry barriers
Reduce planning restrictions and land usage
What are some examples of interventionist supply side policies?
Increase government spending on training schemes
Increase government spending on transport infrastructure
Provide subsides to key sectors
Provide grants to fertilisers
How long does it usually take for interest rates to affect inflation?
About 18 months
What is the transmission mechanism for how interest rates can change AD (referring to hot money)?
Interest rates rise Hot money flows into the UK Demand for the £ increases Exchange rate goes up More imports less exports(SPICED) BoP deteriorates AD falls because (X-M)
What are the strengths of demand side policies?
If the Multiplier effect is large it can create significant growth
If there is spare capacity within an economy, the economy can grow quickly
It can be used quickly to control demand pull inflation
Can get a country out of demand deficient unemployment
What are the weaknesses of demand side policies?
Can create demand pull inflation
If the multiplier is low there will be little effect
If there is no spare capacity, it means that supply side policies need to be introduced
Can lead to a large government deficit and is often unsustainable
What are the five main macroeconomic conflicts?
Inflation and Unemployment Low inflation and growth Growth Vs Environment (try to avoid) Growth and BoP Growth and inequality
How is inflation and unemployment a conflict?
Gov investment creates more jobs which increases AD
as it gives consumers greater disposable income
as a result spending increases
and demand pull inflation occurs
(as a result increased employment means increased inflation)
What is the Relationship between Inflation and Unemployment rate?
There is an inverse relation - as unemployment increases inflation decreases
What model shows the conflict between inflation and unemployment?
The Philips curve.
why is the Philips curve potentially not accurate?
It was created in 1958, and as a result is likely outdated and doesn’t represent todays more complex economy.
What is the Conflict between low inflation and growth?
If there is rapid economic growth, it is more likely that inflationary pressures will increase. Inflation is particularly likely to occur when growth is above the long run trend rate, and AD increases faster than AS.
When the economy is growing very quickly, firms have difficulty employing sufficient skilled labour; this can lead to wage inflation and higher wages cause higher prices. Also, if demand grows faster than supply, firms will respond to shortages by putting up prices.
What is the conflict between growth and the environment?
there can be a strong conflict between economic growth and environmental objectives. Higher GDP leads to higher levels of pollution and consumption of non-renewable resources.
However, it is possible to have economic growth without harming the environment. For example, the development of solar panels has helped increase energy productivity, but it is also better for the environment than burning coal.
What is the conflict between growth and BoP?
As economic growth occurs, UK residents benefit from higher real incomes and because the UK has a high MPM, as incomes rise, imports also rise, worsening the BoP.
What is the UK’s Marginal propensity to import?
0.62, 62p of every pound is spent on imports
What is the economic conflict between growth and inequality?
As the economy grows, incomes usually rise among the top income earners, this increases income inequality
However some think as the rich get richer, more revenue is gained by the government that may allow for higher transfer payments to low income households (trickle down economics)
What were the main policy responses to the Great recession?
- Governments bailed out many banks, after the US Lehman’s brothers incident, the UK bailed out Northern rock, Lloyd TSB and many others to avoid a major loss of consumer confidence
- Cuts in interest rates to encourage spending and investment
- Expansionary fiscal policy, VAT cut from 17.5% to 15%
What were the Key differences between the GFC and the Great Depression policy responses?
- Banks were (Mostly) bailed out in the GFC and didn’t go bust
- There was no major trade war in 2008 (in 1930s, a trade war developed as countries tried to protect domestic industries.
Why did the UK have the slowest recovery on record following the GFC?
- Balance sheet reccession, both COnsumers, firms and banks were in debt
- Shortage of credit, there was hardly any investment
- Rise in EU bond yield (interest on government debt)
- Productivity crisis because low wage growth and limited investment
