Macroeconomic Policy Instruments Flashcards
What are the 3 economic policy instruments?
Fiscal policy
Monetary policy
Supply side policy
What is fiscal policy?
Involves government subsidies ending and taxation.
What are the two types of fiscal policy?
Reflationary fiscal policy
Discretionary fiscal policy
What is reflationary Fiscal policy?
Involves boosting aggregate demand by increasing government spending or lowering taxes
What is a cost of reflationary fiscal policy?
Likely to involve having a budget deficit.
What is deflationary fiscal policy?
Involves reducing government spending or increasing taxes. Likely to involve a budget surplus.
The effects of reflationary fiscal policy
- increase economic growth
- reduce unemployment
- increase inflation
- worsen the current account of the balance of payments (more spent on imports)
The effects of deflationary fiscal policy
- reduce economic growth
- increase unemployment
- reduce price levels
- improve the current account of the balance of payments (less spent on imports)
What are the two features of fiscal policy?
Automatic stabilisers
Discretionary policy
What are automatic stabilisers?
Fiscal policy may automatically react to changes in the economic cycle. Eg. In a recession, government spending will automatically increase on spending etc.
What is discretionary fiscal policy?
Where governments deliberately change their level of spending and tax.
What is government spending split up into?
Current expenditure
Capital expenditure
Taxes should be…
Cheap to collect, easy to pay, hard to avoid and shouldn’t create any undesirable disincentives.
What is a progressive tax?
Where the individuals taxes rise as their incomes rise in order to redistribute income and reduce poverty.
What is a regressive tax?
Where an individuals taxes fall as their income rises. Used to encourage supply side growth and a trickle down effect.
What is monetary policy?
Involves making decisions about interest rates, money supply and exchange rates.
What are the two types of monetary policy?
Contractionary monetary policy
Expansionary monetary policy
What is contractionary monetary policy?
Involves reducing aggregate demand using high interest rates
What is expansionary monetary policy?
Involves increasing aggregate demand using low interest rates
Is the inflation target symmetric or asymmetric?
Symmetric
What are some likely effects of an increase in interest rates?
- high street banks put rates down
- less borrowing
- less consumer spending
- less investment by firms
- less confidence among consumers and firms
- more saving
- a decrease in exports
- an increase in imports
- increase in interest rates
What are supply side policies?
Policies that aim to expand the productive potential of an economy
Examples of supply side policies
Improvement in education and training
Reducing regulation on firms
Privatisation
Problems with fiscal policy?
Takes ages
High taxes - disincentives
Poor info means government might make the wrong decisions on spending and taxes
Can cause a budget deficit
Problems with monetary policy?
2 year time lag
Interest rates can negatively affect investment spending
Problem of the dual economy
Liquidity trap
Problems with supply side policy
Time lag
Very costly to implement
