Macroeconomic Real World Examples Flashcards
Low interest rates (UK)
In 2020, the UK lowered interest rates to 0.1% to stimulate borrowing and spending as part of its response to the COVID-19 pandemic. The goal was to encourage businesses and consumers to take out loans and increase economic activity during a period of heightened uncertainty. This was part of a broader monetary policy strategy to support the economy in the face of widespread lockdowns and economic slowdowns
High interest rates
In the late 1970s and early 1980s, the United Kingdom experienced a period of notably high interest rates as part of an economic strategy to combat inflation. When Margaret Thatcher became Prime Minister in 1979, her government implemented monetarist policies aimed at controlling the money supply to reduce inflation. This approach led to a significant increase in interest rates, which had the following effects:
1.inflation Reduction:
Initially, inflation rose due to an increase in Value Added Tax (VAT), reaching a peak of 21.9%. However, eventually inflation fell back to 8.6%, indicating that the tight monetary policy was effective in controlling inflation over time
- Economic Recession:
The high interest rates contributed to a severe economic recession. Businesses, particularly in the manufacturing sector, faced higher borrowing costs, leading to reduced investment and production. Consequently, manufacturing output dropped by 30% from 1978 levels by 1983 - Currency Appreciation:
High interest rates attracted foreign capital, leading to an appreciation of the British pound. While a stronger currency helped reduce import prices, it also made UK exports more expensive and less competitive internationally, further harming the manufacturing sector.
How can saving be a long-term objective for governments, and why is it important for economic resilience? Use Germany as the case study
Saving as a long-term government objective can significantly enhance a country’s economic resilience by providing a buffer during future financial crises. Germany offers a prime example of this. Post-2008, Germany’s strong savings culture and conservative lending practices helped it weather the global financial crisis better than many other countries. Households maintained low levels of debt, and the government emphasized fiscal prudence. As a result, Germany avoided the consumer debt crises that affected the US and the UK. This savings culture provided a financial cushion, helping the economy recover more quickly and reducing the need for aggressive stimulus measures. In contrast, countries that had higher levels of consumer debt had less flexibility to respond to the crisis without significant government intervention. Germany’s experience highlights the importance of fostering saving and financial discipline during periods of prosperity to better prepare for economic shocks and maintain long-term stability.
Case Study: How do low income tax policies impact economic growth and public services?
A key example of a country with low income tax is Hong Kong. The region has a simple and low tax system, with a maximum income tax rate of 17% and no value-added tax (VAT) or capital gains tax.
Effects of Low Income Tax in Hong Kong:
1. Economic Growth:
• Low taxes attract businesses and skilled workers, boosting investment and productivity.
• Hong Kong has consistently ranked as one of the world’s most competitive economies.
2. High Employment and Entrepreneurship:
• Individuals and businesses keep more of their earnings, encouraging spending, investment, and job creation.
• Many multinational companies establish regional headquarters in Hong Kong due to the favorable tax environment.
3. Limited Public Services and Inequality:
• The government relies on land sales and indirect taxes rather than high income tax revenue.
• Public healthcare and welfare programs are relatively underdeveloped compared to high-tax economies.
• Income inequality is among the highest in the world, as the tax system does little to redistribute wealth.
Low corporate tax / high corporate tax
Ireland’s low 12.5% corporate tax rate attracted multinational corporations, particularly in tech and pharmaceuticals, which set up regional headquarters in the country. In contrast, France’s historically high corporate tax rates discouraged business investment and led to concerns about its impact on economic growth and job creation.
Fiscal expansion
In 2021, the US passed a $1.9 trillion stimulus package to combat the economic effects of the COVID-19 pandemic. The package aimed to boost economic activity by providing direct financial support to households, businesses, and healthcare providers, stimulating consumer spending, and helping the economy recover more quickly.
Strong exchange rate
During the Eurozone crisis (2010–2012), the Swiss franc (CHF) saw a sharp appreciation as investors sought safe-haven assets to protect their capital from economic instability in the Eurozone.
The Impact of a Strengthening Swiss Franc:
As demand for the Swiss franc surged, its exchange rate against the euro and US dollar rose, causing economic challenges:
-Hurt Swiss exports: A stronger currency made Swiss goods and services more expensive abroad, damaging industries like watchmaking, pharmaceuticals, and tourism.
-Deflationary pressure: A higher franc reduced import costs, but also lowered inflation
The Swiss National Bank’s (SNB) Response:
To counteract the excessive appreciation of the franc, the SNB pegged the Swiss franc to the euro at 1.20 CHF per €1, stating it would buy unlimited foreign currency to maintain this floor.
Commodity prices high
In 2022, oil prices spiked due to disruptions in supply caused by the Russia-Ukraine conflict. Sanctions on Russia’s energy exports and the resulting tightening of global oil supplies led to significant increases in energy costs, which contributed to inflationary pressures across many economies, particularly in Europe and the US.
Oil shock/high commodity prices
The 1973 oil crisis, caused by OPEC’s decision to cut oil supply in response to political tensions in the Middle East, led to a sharp rise in oil prices. This caused widespread inflation and a global economic slowdown, as oil-dependent economies struggled to cope with soaring energy cost.
Costs of growth
India’s rapid industrialization in the late 20th and early 21st centuries brought significant economic benefits but also led to environmental degradation, air pollution, and congestion in major cities. The rapid pace of development often overlooked sustainability concerns, leading to a decline in quality of life in urban areas.
Demand-pull inflation
The post-pandemic recovery in 2021 led to increased consumer demand, which, coupled with supply chain disruptions, pushed prices higher in many sectors. As demand for goods and services rebounded quickly, producers struggled to meet this surge, driving up prices in the face of constrained supply.
Cost-push inflation
2022 Global Supply Chain Crisis and Inflation
The 2022 global supply chain crisis was a severe disruption in the movement of goods worldwide, caused by a combination of factors, including:
COVID-19 Aftershocks: Lockdowns in 2020-21 led to factory closures, shipping delays, and labor shortages. When economies reopened in 2022, demand surged, but supply chains struggled to keep up.
Russia-Ukraine War: The invasion of Ukraine led to energy price spikes, as Russia is a major oil and gas exporter. It also disrupted grain and fertilizer supplies, driving up food costs.
Shipping Bottlenecks: Ports were overwhelmed with backlogs due to a lack of workers, rising fuel costs, and shortages of shipping containers, leading to delays and increased transportation costs.
China’s Zero-COVID Policy: Continued lockdowns in China (a major global manufacturing hub) disrupted production and exports.
How Did It Cause Inflation?
Surging Energy Prices: The war in Ukraine led to record-high oil and gas prices, increasing transportation and production costs.
Labor Cost Increases: Worker shortages forced companies to raise wages, adding to costs.
Food Price Inflation: Disruptions in grain and fertilizer exports from Ukraine and Russia led to higher prices for wheat, corn, and cooking oil.
Absolute poverty
In many parts of sub-Saharan Africa, millions of people live in absolute poverty, defined by earning less than $1.90 per day. These individuals lack access to basic necessities such as food, clean water, and shelter, and often experience poor health outcomes, limited education opportunities, and a high risk of early death.
Relative poverty
In the UK, relative poverty is defined as living on an income below 60% of the median income. While individuals in relative poverty may have access to basic needs, they face significant disadvantages in terms of social participation and quality of life, as they are unable to afford the standard of living enjoyed by the majority of society.
Globalisation losers
Rust Belt states in the US, such as Michigan and Ohio, lost manufacturing jobs to countries with lower labor costs, particularly China. The offshoring of production led to economic decline in these regions, with many workers facing long-term unemployment and the collapse of industries that had once been central to local economies.
Fixed exchange rate
Hong Kong has maintained a fixed exchange rate policy since 1983, pegging its currency, the Hong Kong dollar, to the US dollar. This policy aims to provide stability and predictability in exchange rates, supporting Hong Kong’s role as a global financial center and promoting investor confidence.
Managed exchange rate
China actively manages the value of its currency, the yuan (CNY), through a managed exchange rate system rather than allowing a free-floating market rate like the US dollar or the euro.
The POBC does this by printing more yuan and using it to buy US dollars - this directly effects the exchange rate relative to the dollar, since the increased demand for US dollar raises it price whilst simultaneously increasing the supply of yuan and therefore decreasing its price
Why Does China Control the Yuan?
✅ Boosts Exports: A weaker yuan makes Chinese goods cheaper abroad, helping exporters like Huawei and Xiaomi compete globally.
✅ Prevents Volatility: Managed control reduces extreme fluctuations, keeping economic conditions stable.
✅ Maintains Economic Stability: Prevents rapid capital outflows that could destabilize China’s financial system.
However, the US and other countries have accused China of artificially keeping the yuan undervalued to gain a trade advantage. However, in recent years, China has allowed slightly more flexibility, though it still maintains tight control over the currency.
