performance and policies Flashcards
what are all the types of policies that influence AD and AS?
2 demand side policies:
- Monetary policy = BoE changes interest rates and money supply in a way that influences AD
- Fiscal policy = Governement influences AD through changes in Gov spending and Taxes
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And loads of supply side policies which influence the AS (PPF shifts outwards + AS increases to the right)
what is monetary policy ?
the changes in interest rates and money supply to influence the rate of growth of aggeragate demand and inflation
who are the MPC and what do they do?
the monetary policy comittee decides on the interest rate and meets the government inflation target
what are the 2 types of monitary policy?
expansionary and contractionary
what is expansionary monitary policy?
- decreasing interest rates and increasing money supply (QE) causing AD to rise
- saving is less attractive than spending
what is contractionary monetary policy ?
increased interest rates and decreased money supply causing AD to fall
- borrowing is more expensive and saving is more attractive
how do interest rates affect exchange rates ?
increased interest rates makes exchange rate increase due to hot money flows into a counrty because people will get more return on their income
evaluation of monetary policy
- it depends on how high interest rates are
- time lag
- interest rates effect exchange rates, talk about that effect
Evaluation of quantitive easing: - greater income inequality (because QE lead to an increase in asset prices like shares and houses which the rich tend to own a lot more of)
- inflation due to increased money supply
how does Quantitive easing work?
expansionary monitary policy, increases AD!
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if individuals or firms sell bonds to the bank of england they will gain cash from selling these bonds which they can spend in the economy.
how does quantitive tightening work?
central banks sell off assets previously bought so firms and individuals have to pay them reducing money supply .
what is Fiscal policy ?
the manipulation of government spending and taxation to change aggeragate demand and achieve macroeconomic objectives
what is a Budget (fiscal) deficit ?
when governemnt spending exceeds tax revenue
what is a Budget (fiscal) surplus?
when tax revenue exceeds government spending
what are the main taxes in the UK?
- corporation tax (tax on company profits)
- income tax (tax on income of individuals)
- inheritance tax
- VAT
- Counsil tax
and more …
whats the difference between direct tax and indirect tax?
direct taxes are levied on income, wealth and profit, taxes imposed directly on a individual or organisation.
Indirect taxes are levied on spending by consumers on goods and services, They are imposed on suppliers who pass on the cost to consumers by raising prices. therefore consumers pay the taxes indirectly
explain like you would in a question the process of expansionary fiscal policy?
- gov spending is a component of AD
- a rise in gove spending will lead to a rise in AD and national income
- a fall in taxes will cause a rise in Yd and therefore a rise in Consumer spending (consumption)
- there will be a multiplier effect on national income as long as the economy is not at full capacity
- expansionary fiscal policy will also cause a fall in unemployment if new jobs are created
explain like you would in a question the process of expansionary fiscal policy?
- a fall in gov spending or a rise in tax will lead to AD falling
-this will cause national income to fall and have a negative multiplier effect and will also cause job losses
whats the definition of supply side policies ?
supply side policies are a set of economic measures and strategies that aim to improve long-run productive capacity and efficiency of an economy. The primary goal of supply-side policies is to stimulate long term economic growth, increase productivity, and create a more favourable environment for businesses to operate.
how do you show supply side policies effect on a ppf and AS curve ?
PPF shifts right (outwards) and so does AS to AS2
how does PPF and AS curve shift to the right ?
- more workers (labour) factors of production
- more training for workers increasing their productivity
- more investment (capital)
- more advanced technology
what are the market based supply side policies that increase incentives ?
3 policies to increase incentives:
- reducing income tax rates (more incentive to work)
- reducing corporation tax rates (companies have more profits and con invest more and increased confidence)
- reforms to the welfare benefits system (raise real incomes and reduce poverty), less benefits reduces admin cost and increases incentive to work however cuts to benefits can further increase income inequality
what is a supply side policy to promote competition?
- privatisation (is the sale of gov assets to the private assets) and deregulation (the removal of gov intervention in a particular industry to create more competition
BENEFITS: - private companies have a profit incentive so would be better run
-encourage competition - lower costs for businesses
- increased efficiency
NEGATIVES: - lower pay and working conditions for workers
- more environmental degration
- lower health and saftey standards
- increased monopoly power
what are the supply side policies to reduce resitriction in labour markets?
lower minimum wage :
pros -
- lower cost for businesses = lower prices / inflation and increased international competitiveness
- more employment
cons -
- lower incomes for less skilled or lower paid workers
- increased inequality
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**reducing trade union power **
pros -
- less days lost through strikes
- increased output per worker
cons -
- workers on lower pay
- unhappy citezens
- poorer working conditions
whats the meaning of interventionist supply side policies ?
these policies are designed to correct market failure. This means that the governement interveins in free markets to change the outcome.
what are the interventionist supply side policies?
Increased gov spending on education and training
pros :
- create high skilled workers who will earn more in the Long run = more tax revenue
- opportunities for poeple to gain better jobs
evauation :
- oportunity cost (could be spent on NHS)
- time lag before students enter the workforce
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Increased gov spending on infrastructure
pros:
- productivity gains e.g. time savings
- more mobile labour force
- lower cost for busninesses to transport goods
- more competitive economy attracting FDI
evaluation :
- opportunity cost and time lag
- depends on size of gov spending
