Macroeconomics- Macroeconomic Policy Flashcards
What is monetary policy?
A demand side economic policy that attempts to achieve government objectives using monetary instruments
What are the monetary policy instruments?
Interest rates
Exchange rates
Quantitative easing/ money supply
What is the monetary policy committee?
A committee of 9 economists (5 from the Bank of England, 4 independent)
They meet monthly to decide the rate of interest depending on economic indicators such as CPI
What is money?
An asset that can be used as a medium of exchange
What is contractionary and expansionary monetary policy?
Contractionary- aims to decrease aggregate demand to control inflation
Expansionary- aimss to increase aggregate demand to promote growth
What effect does changing the rate of interest have?
Lowering- decreases AD (saving is encouraged, securing credit is more expensive so consumption falls)
Raising- increases AD (people save less, loans like mortgages become cheaper to acquire so consumption rises)
What is an exchange rate?
The rate of currency at which one can be exchanged for another
E.g £1≈1.50$
It it required for international trade
What effect does a change in the exchange rate have on the balance of payments?
Depreciation of the pound:
As the pound falls in value imports become expensive and exports become cheaper, so demand for exports rises while demand for imports fall
Appreciation of the pound:
Imports are less expensive, exports are more expensive so the balance of payments deficit will increase
How do interest rates effect the exchange rate?
High r/i- Increased demand for pounds from foreign investors as they want to keep their money in British banks so pound increases in value
Low r/i- Decreased demand for British pounds and so the pound decreases in value
What is quantitative easing?
When a central bank creates money to purchase bonds from banks which lowers interest rates and encourages lending to consumers and firms to increase AD
What are the three types of government spending?
Current spending- day to day spending on the public sector
Capital spending- money spent on infrastructure
Transfer payments- The money spent on the welfare state e.g. benefits
What is the budget?
A statement made by the chancellor presenting the government’s plans for the economy
What is a stealth tax?
A tax that can be increased without people realising.
E.g the gov has frozen income tax thresholds to 2028 which means more people will pay more tax as income rises with inflation
What is the national debt?
The total amount that a government has borrowed over time.
What are the 5 main ways that fiscal policy can change aggregate supply?
Labour market incentives
(E.g. decrease income tax)
Capital spending
(E.g. grants to firms to invest in capital)
Encourage Entrepreneurship
(E.g. decrease corporation tax)
Research and development
(Increase spending on research and development subsidies)
Improvement in human capital
(E.g. investment into education)
