Monetary and fiscal policy Flashcards
What was the covid monetary response?
weak economic conditions ->
- Lowered policy rate to ZLB
- QE on larger scale than before
What happened to the labour market coming out of Covid?
Very tight labour market
- Unsustainably high levels of job creation
- Businesses experienced shortages of labour
-High vacancy/ unemployment ratio
-caused a large wage growth
What was the covid fiscal response?
Aimed to protect jobs/income
-Ensure people still had wages despite not working
- Minimise unmatching in labor marker
Increase economic activity
-Eat out to help out/direct transfer in US
Overall aim to strengthen firm and household balance sheets
- Increase future ability to spend when covid went away
Explain why the change in relative demand for goods and services affected inflation.
During covid, consumer spending shifted towards goods rather than services, which means the monetary stimulus fell on the goods market. However the goods market was experiencing Global supply chain problems, which meant that the lack of supply and increased demand pushed up the price of goods to much higher levels than expected.
Give 2 supply chain issues due to covid
(Unscheduled) closure of manufacturing and distribution services
- Shipping containers in wrong locations
-Shortage of labour
De-globalisation/trade barriers
Give 2 big shocks after covid that drove up prices
War in Ukraine
- Sharp rise in energy price
- Ukraine/Russia large suppliers of agricultural products
-> Food price increase
Change in trading relationship with EU
-More trade barriers
-Higher cost
How did inflation expectations change during covid
Initially, expectations were anchored at a level consistent with the target
Due to capital of inattention, it was believed that inflation would be transitionary, however the constantly high inflation changed expectations and created a new norm of higher inflation.
Give 3 ways that Government spending can be financed
1) Bond issue
2) Seigniorage from printing money
3) Tax collection
What are the 2 ways that a Government can spend?
- Spending on goods/services
- Pay back principal and interest on bonds
What happens with the Government budget when r<n
Number of goods the economy gains each period is high than the number of goods, the Government has to repay.
This means that RHS increases when bond issuing increases, meaning that after paying off all debt, the Government can increase spending in other areas and “grow out of public debt”
Why is fiscal prudency more important since covid?
r>n and also high inflation and debt,.
Why is CB independence important when contractionary monetary policy has to happen
CB will raise policy interest rate and do QT. The change in the CBs policy rate will have an immediate effect on the overnight money market interest rate. The CB will ensure that the interest rate in the money market is the same as the policy rate. This means that eventually, the Government will have to pay a higher interest rate on the Government debt. Therefore, indpendence is important as the priorities of Government and CBs may differ more significantly when inflation is high and and debt is significant.
