pmt pilicy Flashcards
Current spending
Expenditure on public services
Capital spending
Spending on infrastructure
Welfare spending
Money given to people on welfare, e.g. pensions
Direct tax
Tax on income
Indirect tax
Tax on spending
3 types of tax
Proportional, regressive, progressive
2 types of budget deficit
Cyclical
Structural
Describe a cyclical budget deficit
Temporary deficit which changes due to the state of the economy
Describe the structural deficit
Permanent deficit due to the structure of the economy
Difference between national debt and budget deficit
National debt is the total amount of money the government owns
Budget deficit is the difference between money in and out
Describe expansionary fiscal policy
Reduction in tax and increase in spending
How does expansionary fiscal policy affect AD
Shifts AD to the right
Describe the effect of reducing welfare payments
Forces those who are not disabled to work however bad for disabled people
Effects of raising the minimum wage
Increases the size of the workforce by incentivising workers. Shifts LRAS right.
However would also cause an increase in costs
What is the main limitation of expansionary fiscal policy
Crowding out - high levels of gov expenditure cause a reduction in private investment
Describe deflationary fiscal policy
Reducing gov spending and increasing tax
Describe monetary policy
Controlling the supply of money within the economy with the goal of influencing inflation
How does the bank of England influence MS
QE - quantitative easing
Changing the base interest rate
Describe how changing interest rates has an effect on MS
Increases or decreases the reward for saving
Disadvantages of using the base rate to influence MS
Takes a long time
If the economy is unstable banks may not give out loans
Describe hot money
When foreign bankers put money into UK banks because interest rates are higher in the UK
Advantages of hot money
Increases the demand for a currency which increases its value
Describe QE
Banks buy back bonds from financial organizations causing an increase in MS
When is it suitable to use QE
When inflation is low
What are the results of QE
Increases MS
Causes inflation
Why is QE different from printing money
Financial organizations act as intermediates so the effects are limited
Why are banks forced to change IR when base rate changes
Banking is a competitive sector
Describe a liquidity trap
When a change in IR doesn’t affect MS
What is inflation targeting
When the central bank sets a goal for what they think inflation should be
What is the aim for inflation in the uk
2%
Describe SSP
Government policies aimed at increasing the productive capacity of the economy
What are the 2 types of SSP
Interventionist
Market-based
Effects of interventionist policy
Increases both AD and AS
Reducers both structural and cyclical unemployment
Little or no inflation - AD and AS both increase
Effect of interventionist policy on BOP
Reduces the deficit in the current account
Improve the state of the financial account
Limitations of interventionist policy
Time lags - doesnt work in short term
