Macroeconomic Policy Instruments Flashcards
What is fiscal policy?
A type of policy used by the government to influence the economy or individuals, using mainly government spending and taxation
What are the two kinds fiscal policies?
Expansionary fiscal policy, which involves increasing AD
Contractionary fiscal policy, which involves reducing AD
Why is expansionary fiscal policy likely to be used during a recession?
It will increase economic growth and reduce unemployment, it may also increase inflation and worsen balance of payments
Why is contractionary fiscal policy likely to be used during a boom?
It will reduce price levels and improve the balance of payments, but it may decrease economic growth and increase unemployment
What is an automatic stabiliser?
When some of a government’s fiscal policy may automatically react to changes in the economic cycle
What is progressive tax?
When an individual’s taxes rises, as a percentage of their income, as their income rises
What is regressive tax?
When an individual’s taxes fall, as a percentage of their income, as their income rises
What is proportional tax?
When everyone pays the same tax regardless of their income level
What can government spending be affected by?
- Size of a population
- Government policies on inequality, poverty and redistribution of income
How is a budget deficit paid for?
Public sector borrowing
What are the problems linked with excessive borrowing?
- Demand pull inflation
- Rise in inflation and interest rates
- Rise in national debt
- Less foreign direct investment
What is the golden rule in borrowing for the government?
The government can borrow to invest in things like infrastructure, which can make for future growth, but cannot borrow to fund current expenditure
What is monetary policy?
A policy that involves making decisions about interest rates, the money supply and exchange rates
What does the MPC do?
Sets interest rates in order to meet the inflation target set by the government
What are the effects of an increase in interest rates?
- Less borrowing
- Less consumer spending
- Less investment
- Less confidence among consumer & firms
- More saving
- Decrease in exports
- Increase in imports
What is the aim supply side policies?
To expand the productive potential or increase the trend rate of growth
What are the 2 types of supply side policies?
Free market and interventionist
What is a free market supply side policy?
Policies that aim to increase efficiency by removing things which interfere in the free market. E.g. tax cuts, privatisation, deregulation
What is an interventionist supply side policy?
A policy aimed at correcting market failure
What is the purpose of using supply and demand side policies together?
Supply side policies create long run growth, demand side policies stabilise the economy in the short run
What do Keynesian economist believe?
That the government needs to intervene to get the economy closer to full employment
What do classical economists believe?
That the economy usually operates at full capacity and employment on its own
What is quantitative easing?
When money is injected into the economy to stimulate aggregate demand at a time when interest rates are already very low
How does quantitative easing work?
It increases the money supply by selling government bonds creating new money and using it to buy assets owned by other financial institutions. The hope is that this will cause an increase in spending and lending
What are the advantages of a budget deficit?
- Higher growth, lower unemployment
- Increased Gov Spending
- Redistribution of income
- Incentives of tax cuts
- Crowding In effect
What are the disadvantages of a budget deficit?
- Worsening Gov finances
- Inflation Conflict
- Current account deficit conflict
- Crowding out effect
- X - inefficiency
What is a structural budget deficit?
A budget deficit at full employment
What is a cyclical budget deficit?
A budget deficit in a recession
What are the advantages of a budget surplus?
- Confidence in Gov finances
- Flexibility with fiscal policy
- Less crowding out/ X inefficiency
- Lower inflation and CA deficit
What are the advantages of interventionist supply side policies?
- Improvements in human capital
- Better Infrastructure
- More support for innovation and technology
- Regional development
What are the disadvantages of interventionist supply side policies?
- High costs & Time lags
- Increased national debt
- Difficulty measuring effectiveness
- Increased Inequality
What are the advantages of market based supply side policies?
- Increased efficiency
- Encouragement of entrepreneurship and innovation
- Improved resource allocation
- Reduced government burden
What are the disadvantages of market based supply side policies?
- Increased inequality
- Environmental Degradation
- Difficult to regulate properly
