Pack 4: Macroeconomic policy and conflict Flashcards
What is fiscal policy?
Use of government spending and taxation to influence level of AD
What is direct tax?
Levy targeted at one person on basis of income
What is indirect tax?
Levy imposed on the consumption of a good or service
What is a budget/fiscal deficit?
Government spends more than it receives in tax revenue in given year
What is budget/fiscal surplus?
Government spends more than it receives in tax revenue in a given year
When is the budget expansionary?
When the deficit increases or the surplus decreases, injection into circular flow/smaller withdrawal
When is the budget contractionary?
Deficit decreases or surplus increases, smaller net injection or larger net withdrawal to circular flow
What are the issues with running a budget deficit and increasing national debt?
~Tax rises in future
~Opportunity cost
~Crowding out
~Impact on credit rating
~No one wants to lend
What is monetary policy?
Use of monetary instruments, such as interest rates and money supply to influence AD
What is expansionary monetary policy?
Down interest rates and QE
What is contractionary monetary policy?
Increasing interest rates, reducing money supply
Who controls interest rates?
Monetary Policy Committee (MPC) of the Bank of England to ensure that best decisions made for the economy without political interference
What demand side factors effect inflation?
~Consumption prospects
~Investment prospects
~Government spending changes
~Net export prospects
What are interest rates?
Cost of borrowing and reward for saving
What supply-side factors effect inflation?
~Exchange rates
~Commodity prices
~Changes in indirect taxation
~Firm’s wages and costs
~Productivity changes
What is QE?
Process by which liquidity in the economy is increased when the central bank purchases assets from banks
How does QE boost AD?
~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
What are the side effects of monetary policy?
~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)
What was the main example of expansionary fiscal policy during Great Depression in the US?
Roosevelts New Deal
What caused the depression to last longer in the US?
Contractionary monetary policy of high interest rates
What helped economic recovery in the UK
Expansionary monetary policy of cutting interest rates
What made the depression worse in the UK?
Contractionary fiscal policy of trying to balance the budget
What measures did both countries use which made the depression worse?
Protectionist measures
What did both countries do during the Financial Crisis of 2008?
Expansionary fiscal and monetary policy and little protectionism until Trump and Brexit
What are supply-side policies?
Policies undertaken by government to increase productive potential of economy and LRAS
What are interventionist supply-side policies?
Government directly intervening to boost LRAS
What are Market based supply-side policies?
Policies allowing markets to work more freely and providing incentives to boost LRAS
What are the key supply-side policies which can be used? (all can be both interventionist or market based, see pack)
~Increasing incentives
~Promoting competition
~Improving infrastructure
~Improving skills/quality of labour force
~reform of labour market
What are the strengths of supply side policies?
~Meeting Macro objectives simultaneously
~Long-term macroeconomic management
~Less reliance on short-term economic data
What are the weaknesses of supply-side policies?
~Policies not always effective (LRAS not boosted)
~Significant time lags
~Magnitude of effects
~Side effects
~AD still needs to be managed carefully
What is shown by the short-run Phillips Curve?
Shows the inverse relationship between inflation and unemployment which only holds in the short-term
Why are policy conflicts and trade-offs important?
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
