Pack 4: Macroeconomic policy and conflict

Question 1

What is fiscal policy?

Answer 1

Use of government spending and taxation to influence level of AD

Question 2

What is direct tax?

Answer 2

Levy targeted at one person on basis of income

Question 3

What is indirect tax?

Answer 3

Levy imposed on the consumption of a good or service

Question 4

What is a budget/fiscal deficit?

Answer 4

Government spends more than it receives in tax revenue in given year

Question 5

What is budget/fiscal surplus?

Answer 5

Government spends more than it receives in tax revenue in a given year

Question 6

When is the budget expansionary?

Answer 6

When the deficit increases or the surplus decreases, injection into circular flow/smaller withdrawal

Question 7

When is the budget contractionary?

Answer 7

Deficit decreases or surplus increases, smaller net injection or larger net withdrawal to circular flow

Question 8

What are the issues with running a budget deficit and increasing national debt?

Answer 8

~Tax rises in future
~Opportunity cost
~Crowding out
~Impact on credit rating
~No one wants to lend

Question 9

What is monetary policy?

Answer 9

Use of monetary instruments, such as interest rates and money supply to influence AD

Question 10

What is expansionary monetary policy?

Answer 10

Down interest rates and QE

Question 11

What is contractionary monetary policy?

Answer 11

Increasing interest rates, reducing money supply

Question 12

Who controls interest rates?

Answer 12

Monetary Policy Committee (MPC) of the Bank of England to ensure that best decisions made for the economy without political interference

Question 13

What demand side factors effect inflation?

Answer 13

~Consumption prospects
~Investment prospects
~Government spending changes
~Net export prospects

Question 14

What are interest rates?

Answer 14

Cost of borrowing and reward for saving

Question 15

What supply-side factors effect inflation?

Answer 15

~Exchange rates
~Commodity prices
~Changes in indirect taxation
~Firm’s wages and costs
~Productivity changes

Question 16

What is QE?

Answer 16

Process by which liquidity in the economy is increased when the central bank purchases assets from banks

Question 17

How does QE boost AD?

Answer 17

~Up money supply for banks, up lending/investment
~Down government bond yield, less ROI:
+Up prices of shares and properties as people investing in them more
+Positive wealth effect
+Demand for £ down as less investment into government bonds, reduces exchange rate boosts net exports

Question 18

What are the side effects of monetary policy?

Answer 18

~Higher interest rates can increase income inequality
~Higher interest rates can reduce competitiveness
~QE can cause asset bubbles
~Up interest rates can lead to lower business investment (conflict)

Question 19

What was the main example of expansionary fiscal policy during Great Depression in the US?

Answer 19

Roosevelts New Deal

Question 20

What caused the depression to last longer in the US?

Answer 20

Contractionary monetary policy of high interest rates

Question 21

What helped economic recovery in the UK

Answer 21

Expansionary monetary policy of cutting interest rates

Question 22

What made the depression worse in the UK?

Answer 22

Contractionary fiscal policy of trying to balance the budget

Question 23

What measures did both countries use which made the depression worse?

Answer 23

Protectionist measures

Question 24

What did both countries do during the Financial Crisis of 2008?

Answer 24

Expansionary fiscal and monetary policy and little protectionism until Trump and Brexit

Question 25

What are supply-side policies?

Answer 25

Policies undertaken by government to increase productive potential of economy and LRAS

Question 26

What are interventionist supply-side policies?

Answer 26

Government directly intervening to boost LRAS

Question 27

What are Market based supply-side policies?

Answer 27

Policies allowing markets to work more freely and providing incentives to boost LRAS

Question 28

What are the key supply-side policies which can be used? (all can be both interventionist or market based, see pack)

Answer 28

~Increasing incentives
~Promoting competition
~Improving infrastructure
~Improving skills/quality of labour force
~reform of labour market

Question 29

What are the strengths of supply side policies?

Answer 29

~Meeting Macro objectives simultaneously
~Long-term macroeconomic management
~Less reliance on short-term economic data

Question 30

What are the weaknesses of supply-side policies?

Answer 30

~Policies not always effective (LRAS not boosted)
~Significant time lags
~Magnitude of effects
~Side effects
~AD still needs to be managed carefully

Question 31

What is shown by the short-run Phillips Curve?

Answer 31

Shows the inverse relationship between inflation and unemployment which only holds in the short-term

Question 32

Why are policy conflicts and trade-offs important?

Answer 32

All macro objectives cannot be met at once as there is conflict between polices. This means government needs to prioritise the objectives most important to them