micro and macro effects Flashcards
(37 cards)
macro effects of a weak exchange rate
improvement in current account balance as more expensive imports cheaper exports
therefore net exports in AD equitation can rise so economic growth therefore lower unemployment, high demand pull inflation
or supply side as more expensive imports can drive up COP for firms across the economy pass on cost push which if dominant could cause lower growth higher unemployment
Potential for greater FDI, lower start up costs and cheaper exports nudging foreign firms
micro effects of weak exchange rate
high prices for consumers
high cost of production past on to consumers lower profits lower dynamic efficiency
high debt servicing costs if debt in foreign currency
inefficiency productive and x as complacency due to natural benefits rising costs
what are protectionists policies
protecting domestic industries against foreign competition through tariffs, import quotas and subsidies, or other restrictions placed on the imports of foreign competitors.
micro effects of protectionist policies
high prices
lower quantity, consumer choice and producer choice
producer revenue up,
consumer surplus falls DWL, but producer rises
allocative inefficiency do to movement from comparative advantage countries to domestic firms who lack advantage
macro effects of protectionist policies
governemnt revenue to service debt or deficit or fund government expetiture
inflation for firms importing goods production costs rise
current account balance could improve by constraining import expenditure or even higher net exports
macro effects of protectionist policies
government revenue to service debt or deficit or fund government expenditure
inflation for firms importing goods production costs rise
current account balance could improve by constraining import expenditure or even higher net exports due to Certus paribus higher AD
employment encourage greater domestic output protects and even creates employment as derived demand
macro effects of strong exchange rate
SPICED so current account deficit
AD lower x-m, lower growth higher cyclical unemployment, lower demand pull inflation
SRAS, cheaper firms access raw materials shifting SRAS right
Less FDI harder to set up higher sunk costs and less exports
micro effects of strong exchange rate
higher profitability cheaper imports but could hurt if exports dearer
domestic producer efficiency, boost efficiency e.g training, capital, reduce x inefficiency
cheaper imports low prices good for consumers, higher consumer surplus
examples interventionist policies to promote development
government spending on education, health, infrastructure, aid money, manage trade, nationalisation, subsidy price control
macro interventionist policies to promote development
growth , lower unemployment
LRAS, higher long term growth, prosperity, international competitiveness
income inequality reduce it e.g. govt spending on welfare or regulation on workers e.g. min wage, nationalisation.
risk of govt finance worsening if fuelled by borrowing long term implications for future generations
micro interventionists policies to promote development
allocative inefficiency e.g protectionist policies due to comparative advantage being taken away, price controls min/max impact on living standards
gov failure, unintended consequences or government corruption giving govt power e.g. Aid money
x inefficiency, govt doesn’t have profit motive costs’ can spiral, nationalisation
but could get allocative efficiency if fixes market failure e.g. education and health are merit goods
examples of expansionary monetary policy
lower interest rates, QE,
macro effects of expansionary monetary policy
higher growth
lower unemployment, CYCLICAL
higher inflation demand pull
via increase in AD exports less competitive, lower export revs, more imports so worsening of current account position OR it rates leading to weaker exchange rate via hot money outflows
micro effects of expansionary monetary policy
reduce rates of return on savings, pensioners, unemployed therefore worse off living standards reduced
impact on housing market, lower IT cheaper to borrow money increasing demand and house prices but worse off for first time buyers
lower firms costs on variable interest rates lowering cost of production higher profits
better for indebted households increasing living standards
macro effects of contractionary monetary policy
lower growth
higher unemployment cyclical
lower inflation great as CPI 10.1%
Current account improvement exports now more internationally competitive as lower rates of inflation and lower growth, lower wages lower expenditure on imports
or higher money inflows via hot money appreciating the currency which actually worsens CA
high interest rates reduces chance of systemic risks like bank failure as high interest rates discourages amount of borrowing by business and households discouraging household and corporate debt more saving takes pressure off banking sector less chance of shock
reduces chance of credit and asset bubbles as only those who can afford or need will borrow sustainable borrowing.
micro effects of contractionary fiscal policy
positive impact on savers
fall in house prices good for first time buyers bad for consumer confidence
impact on firms who have loans and have variable interest rates could increase COP passing on to the consumer hurting profitability
worsen indebted households repaying with higher variable interest rates hurting living standards and reducing disposable income
what is expansionary fiscal policy
increases in govt spending, cutting taxation and running a budget deficit.
macro effects of expansionary fiscal policy
higher growth
higher employment
high inflation demand pull
higher current account deficits due to higher inflation eroding export competitiveness and increase imports as high growth lower unemployment, higher disposable incomes
gov finances impact rising budget deficit from borrowing burdening future generations
micro effects of expansionary fiscal policy
crowding out takes place in the loanable funds market
solves market failures on education, infrastructure improving allocative efficiency
public service impact quality of education and healthcare
x inefficiency due to lack of profit motivation, wasteful, opportunity costs
increases profit for firms due to tax cuts
macro effects of contractionary fiscal policy
improve government finances, benefits of budget surplus and decreasing national debt increases confidence in govt finances increasing coupon rates on govt bonds easier for govt to borrow overtime and increased FDI, fiscal space to fund for future recession
reduce demand pull inflation
improve current account deficit to reduce imports
lower growth
higher cyclical unemployment
lower govt spending on key sectors e.g education could cut LRAS productive capacity reducing investment and productivity
micro effects of contractionary fiscal policy
less chance of crowding out of private sector e.g. loanable funds market
less x-inefficiency from wasteful gov spending
worsening on public spending could cause individual impact on people who rely
inequality cutting G and rising regressive taxes increases income inequality
macro effects of free trade
comparative advantage, benefits and costs of current account good for some bad for others
boost in AD higher x-m, higher growth lower unemployment and demand pull inflation
improved living standards and poverty alleviation
dynamic efficiency and technology increases LRAS
micro effects of free trade
lower prices higher consumer surplus with higher quantity and choice
producer surplus from cheaper imports
higher competition driving up efficiency
better tech lowering cost of production
economies of scale
macro effects of supply side policies
LRAS
higher growth
lower unemployment
lower inflation
improvement in current account exports more competitive
if interventionist hit to gov finances worsening budget deficit, worsening national debt
