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Economics (Vicky) real one > Macroeconomics Government Policies > Flashcards

Macroeconomics Government Policies Flashcards

1
Q

Government policies - Fiscal Policy

A

Government adjusts the economy by changing either government spending, taxation or both.

[Taxes include both direct taxes and corporate taxes]

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2
Q

Expansionary Fiscal Policy

A

When the government intervenes in the economy and either decreases taxation, increases government expenditure or both

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3
Q

Deflationary/Contractionary Fiscal Policy

A

When the government intervenes in the economy and either increases taxation, decreases government expenditure or both

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4
Q

Expansionary Fiscal Policy - Sources of Revenue

A
  • Direct and indirect taxation
  • Sale of goods and services from state-owned enterprises
  • Sale of government assets

They can also adjust their expenditures:

  • Current expenditures
  • Capital expenditures
  • Transfer payments
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5
Q

Expansionary Fiscal Policy - Sources of Revenue 2

A

Printing money - not good, inflation

Borrowing from overseas - government borrows from international sources

Borrowing domestically (open market operations) - government buys and sells bonds in the market

  • Government bonds: a security in which investors pay a premium today, earn interest over a period of say, five years, after which the original premium is repaid
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6
Q

Goals of Fiscal Policy

A
  • Low and stable inflation
  • Low unemployment
  • Promote a stable economic environment for long-term growth
  • Reduce business cycle fluctuations
  • Equitable distribution of income
  • External balance
  • Close deflationary/recessionary and inflationary gaps
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7
Q

Evaluating the Effectiveness of Fiscal policy

A

Strengths of fiscal policy:

  • Targeting of specific economic sectors
  • Government spending effective in deep recession
  • Automatic Stabilizers (HL)

Constraints on fiscal policy:

  • Political pressure
  • Time lags
  • Sustainable debt
  • Crowding out (HL)

Strengths and limitations in promoting growth, low unemployment, and low and stable inflation rate

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8
Q

Keynesian Multiplier - HL Only

A

(used to fill a deflationary gap)
A multiplier is the ratio of change in the level of national income to an initial change in one or more injections into the circular flow model (I, G, C).

It assumes…

  • That the government is increasing expenditures or businesses are increasing investment
  • That we are only looking at one instance, not a continuous flow
  • That AD rises
  • Explain the multiplier effect of injections on national income

Any injections are multiplied through the economy as people receive a share of the income and then spend a part of what they receive.

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9
Q

Crowding Out (HL)

A

When public sector spending replaces private sector spending.

Gov. Spending increase → help GDP and economic growth → more money to spend → consumers either spend more or take out loans → since people take out more loans, banks can raise interest rates → makes borrowing more expensive for private sector

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10
Q

Automatic stabilizers (HL)

A

A system that automatically helps soften the blow when the economy goes through ups and downs

In a recession: People earn less or lose jobs, so they pay less in taxes and may get unemployment benefits. This puts money in their pockets and helps the economy bounce back.

In a boom: People earn more and pay higher taxes, which slows things down a bit and keeps the economy from overheating.

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11
Q

Government policies - Monetary Policy

A
  • Government adjusts the economy by changing the interest rate or the money supply
  • A very important component of AD is investment (AD = C + I + G + (X - M)).
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12
Q

Goals of Monetary Policy

A
  • Low and stable inflation rate
  • Low unemployment
  • Reduce business cycle fluctuations
  • Promote a stable economic environment for long-term growth
  • External balance - the value of a country’s export earnings being equal or approximately equal to the value of its import expenditure
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13
Q

Expansionary Monetary Policy

A

Decreases the interest rate

Decrease in interest rates = lower investment costs = incentive to invest/more investment = AD increase

More investment = more capital stock = expanding the economy’s capacity = AS increase

Why is price indeterminate?

Because we cannot tell if the increase in capacity is proportionate to the increase in investment.

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14
Q

Advantages of expansionary Monetary Policy

A
  • Decrease in interest rates = lower investment costs = incentive to invest/more investment = AD increase
  • Investment increase = increase capital stock = increasing the capacity to produce in LR = increase AS
  • Investment increases = more labour is replaced by capital = free up labour resources that can be used elsewhere in the economy
  • Used to control inflation and manage the private sector
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15
Q

Success/effectiveness of Monetary Policy

A

Strengths of monetary policy, including:

  • Incremental, flexible, easily reversible
  • Short time lags - quick reaction from public

Constraints on monetary policy, including:

  • Limited scope of reducing interest rates, when close to zero
  • Low consumer and business confidence

Strengths and limitations in promoting growth, low unemployment, and low and stable inflation rate

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16
Q

Real vs. Nominal Interest rates

A

Interest rate is the price of money, expressed as a percentage, and represents the cost of borrowing or the return for savers.

Nominal interest rate - the actual rate that is agreed between a bank and the customer

Real interest rate - the impact of inflation on the return to savers and the cost of debts to borrowers.

Real interest rate = nominal interest rate - inflation rate

Example: If bank pays savers nominal interest rate of 2% but inflation is 1.5% then the real return is only 0.5%.

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17
Q

The process of money creation by commercial banks (HL Only)

A

Credit creation - the process by which banks create money from the deposits of savers and borrowers

18
Q

What is Supply Side Policies?

A

Government measures that improve the quantity or quality of production factors, boosting economy’s capacity and promoting competition for greater efficiency.

19
Q

Goals of Supply-side policies

A
  • Long-term growth by increasing the economy’s productive capacity
  • Improving competition and efficiency
  • Reducing labour costs and unemployment through labour market flexibility
  • Reducing inflation to improve international competitiveness
  • Increasing firms’ incentives to invest in innovation by reducing costs
20
Q

Supply Side Policies (Market based & Interventionist)

A

Market based policies:

  1. Removing labour market rigidities
  2. Incentive related policies: Encouraging firms to increase output and individuals to work
  3. Privatisation
  4. Deregulation
  5. Trade liberalization
  6. Anti-monopoly regulation
  7. Measures to encourage small business start-ups

Interventionist policies: Requires $

  1. Increased spending on Education and Training
  2. Improving quality, quantity and access to health care
  3. R&D
  4. Provision of infrastructure
  5. Industrial policies
21
Q

Removing labour market rigidities

A

Refers to removing the rigidities that may stop labour markets from moving into equilibrium

  • Reduce the power of trade unions
  • Reduce unemployment benefits (Reduce welfare to increase the opportunity cost of being employed)
  • Remove/abolish minimum wage
22
Q

Incentive related policies: Encouraging firms to increase output and individuals to work

A
  • Personal income tax cuts
  • Cuts in business tax and capital gains tax
  • Decrease profit tax
  • Offer tax deductions on the purchase of capital goods
23
Q

Policies to encourage competition: Privatisation

A

The transfer of ownership from the public sector to the private sector (i.e. sell off government assets)

Designed to break up the state monopolies to create more competition.

With a profit motive, firms aim for cost-efficient production = boosting efficiency = AS increase

24
Q

Policies to encourage competition: Deregulation

A

Removing government regulations regarding production decisions for industries e.g. safety standards on airlines.

Deregulation = opening up of markets to greater competition.

25
Q

Policies to encourage competition: Trade liberalization

A

Trade creates competition and should be a catalyst for improvements in cost and lower prices for consumers

26
Q

Policies to encourage competition: Anti-monopoly regulation

A

Laws that control or limit the restrictive practices and market power of dominant firms in an industry protect the interests of consumers against anti competitive behaviours or monopolies.

Examples: investigations by agencies, price controls/price ceilings, regulations of mergers and takeovers

27
Q

Measures to encourage small business start-ups

A

Government policy initiatives designed to stimulate new businesses may include:

  • Business start-up grants
  • Loan guarantee schemes
  • Lower rates of corporation tax for small businesses
  • Investment allowances and regional policy assistance for new business start-ups in some area
28
Q

Increased spending on Education and Training

A
  • Government spending on education and training may improve workers human capital.
  • They become better quality workers.
  • Their productivity improves = LRAS increase = promoting growth in output and employment.
29
Q

Improving quality, quantity and access to health care

A

Improves lives, thus the productivity of workers = LRAS increase

30
Q

R&D

A

The process of business activities to improve, introduce and innovate products, processes and procedures

31
Q

Provision of infrastructure

A

Investing in infrastructure –> enhances efficient and productive output –> attracting investment from domestic and multinational companies

32
Q

Industrial policies

A

Target specific key industries to promote economic growth and employment

33
Q

Effectiveness of supply-side policies

A

Strengths of supply-side policies:

  • Market based - improved resource allocation, no burden on government budget
  • Interventionist - direct support of sectors important for growth

Constraints on supply-side policies:

  • Market based - equity issues, time lags, vested interests, environmental impact
  • Interventionist - costs, time lags

Strengths and limitations in promoting growth, low unemployment and low/stable inflation rate

34
Q

When are Supply Side Policies most effective?

A

When economy is at maximum output capacity (yf)

35
Q

Minimum reserve ratio

A

The minimum reserve requirement for commercial banks at the central bank, limiting their lending and credit creation capacity

36
Q

Money multiplier

A

The formula used to calculate by how much an initial deposit (savings at a bank) increases the money supply. The formula is :

Money multiplier = 1 ÷ Reserve ratio

37
Q

When is Fiscal Policy most effective? (relates to Crowding Out)

A

Recession –> more effective:

  • Because private companies aren’t investing much
  • Government spending boosts demand without “crowding out” private investment.

Booming economy –> less effective:

  • Businesses are eager to invest
  • Gov. spending increase interest rate –> borrowings are more expensive –> investment decrease
38
Q

Tools of monetary policy - OMO

A

Open market operations (OMO) - Central bank’s buying and selling of government bonds to influence interest rates.

39
Q

Tools of monetary policy - MLR

A

Minimum Lending Rate - Minimum interest rate the central bank charges on loans to commercial banks.

Raising the MLR = contractionary monetary policy

Lowering the MLR = expansionary monetary policy

40
Q

Economic Growth and the PPC

A

Economic growth happens in two ways:

  1. Using idle resources: Moving from inside the PPC to closer to it by reducing unemployment and improving efficiency.
  2. Expanding capacity: Outward shift of the PPC by increasing resources and productivity through investment.
41
Q

Tools of Monetary Policy - Quantitative Easing

A
  • Central bank creates new money to buy government bonds or other financial assets.
  • This puts more money into the economy, making it cheaper to borrow and spend.

Central bank creates money → cần phải cho dòng tiền vào economy bằng cách… → buys bonds from financial institutions → financial institution now have more money → nhiều tiền trong thị trường hơn → interest rate decrease → business and people borrowing more money → this money is used to create jobs and R&D → boosts the economy

42
Q

Liquidity trap

A

Interest rates are low, yet people don’t want to borrow money = makes expansionary monetary policy ineffective

A sign that banks are reluctant to lend and consumers are reluctant to borrow due to lack of confidence in the economy - so they use QE

Economics (Vicky) real one (21 decks)

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