policies Flashcards
what is fiscal policy
government expenditure and taxation
what is monetary policy
central bank decisions on the rate of interest, money supply and exchange rate
what is supply side policy
policy designed to increase AS by improving efficiency of labor and product markets
what are the 3 components to the government budget
expenditure, receipts and borrowing requirement
what is capital expenditure
improving the capital stock of the country
what is current expenditure
running public services day to day
what are transfer payments
benefits
what is progressive tax
larger percentage pf income from high income groups
what is proportional tax
same percentage of income from all income groups
what is regressive tax
tax that takes a larger percentage of income from low income groups
what is direct tax
levied on the income or profits of the person who pays it
what is indirect tax
levied on goods and services
what is a budget deficit
government spends more that it receives (expansionary)
what is budget surplus
government spends less that it receives (deflationary)
what is a balanced budget
spends the same as it receives
why do government operate budget deficits
cyclical - needs to respond to economic cycle (recession). structural - deficit when the economy is at full employment or strong
what is a cyclical deficit and why run one
in times of recession government run a budget deficit because tax revenue is far lower, reasons for spending is higher
what are automatic fiscal stabilizers
in a recession tax revenue falling but increased government spending on benefits will help stabilize the economy
what is the difference between debt and a deficit
deficit is current and a debt is constant
what is the national debt
money the government owes, made up of all the money the government has borrowed
what are the consequences of debt
has to be repaid by the next generation,
what can the government do if the debt gets too big
increase tax, austerity (cut back on public spending), boost economic growth
what is discretionary fiscal policy
deliberate attempts to affect AD by changing government spending/borrowing and tax. Expansionary to grow the economy. Deflationary to slow down the economy.
how do you get expansionary fiscal policy and what are the problems with it
raise levels of G e.g. increase capital spending to generate long term growth. May require an increase in taxes which could be deflationary. However it adds to national debt, has a a time lag, may lead to ‘crowding effect’
how do the government finance increased spending
borrow from the private sector. they sell bonds, gilts and other securities to them and the private sector lend their money
what can increased government spending do
put upward pressure on interest rates to attract enough savers
What are the EU rules for government debt
must not be more than 60% of GDP, deficit must not be more than 3%
what are the reasons for fiscal rules
put pressure on government to stick to fiscal responsibilities, increase confidence, single currency
what are the problems with fiscal rules
adopt strict austerity measures, lack of alternative policies, lack of flexibility
what do the central bank make decisions on
rate of interest, money supply, quantitative easing, inflation rate targets and exchange rates
What does an increase in interest rates cause
deflationary money policy - reduced, I,C, X, M
what constitutes money?
3% notes/coins, 18% reserves and 79% bank deposits
what are bank deposits
banks create around 80% of money in the economy as electronic deposits
what can increase in money supply do to AD
shifts right (more investment etc as more money circulating)
what is quantative easing
increasing the money supply by the central bank electronically creating money. This money is then used to buy government bonds.
QE flow diagram
central bank creates money - people buy bonds - reduces interest rates - people and businesses borrow more - spend more and create more jobs - boosts the economy
what is an exchange rate
price of one country’s currency in terms of another country’s currency
what does SPICED stand for
strong pound imports cheap exports dear
what can a strong pound do to inflation
keep it low
relationship between interest rates and strength of pound
if interest rates increase so does the strength of the pound
what can help cause a strong pound
keeping the economy stable
What is hot money
businesses and investors moving money around the world . Goes to the country with the best return. The UK raising interest rates causes speculators to get more in return. They move their money to £ increasing demand and raising price.
how important is the exchange rate to the UK
not widely used in UK. In China it is constantly manipulated to keep the value of their money low
How does the bank of England influence the amount of money banks create
regulate the banks (setting a strict minimum level) and by manipulating the interest rates.
What and why is this the target rate of inflation
2% because it is regarded as stable and economic growth is targeted at 2%. Low so UK can remain competitive so x can increase shifting AD right.
explain how interest rates effect AD.
Low interest rates cause people to borrow more. Businesses/individuals take out more loans to buy things, increasing consumption and investment. pay less back on existing loans so they have lower costs and higher profit margins. Could use the extra money to expand creating more jobs, more people are earning and spending increases consumption. More loans more money supply.
what is the liquidity trap
when monetary policy becomes ineffective because people want to hold cash rather than spend or buy liquid assets.
examples of supply side policy
privatization, deregulation, subsidies, competition policy, investment, reforms of tax/benefit system, immigration control and improved labour market flexibility
What can shift AS to the right
government has increased the capacity of the economy or the resources that they currently have are being used more efficiently
what is the advantage and disadvantage to supply side policies
does not increase price level. Ineffective if economy is in a recession/high unemployment/ high negative output gap.
what are free market policies
increase competitiveness and competition
what are interventionist policies
government intervention to overcome market failure e.g. increasing educations and training, improving transport and infrastructure, build more affordable homes, improved healthcare
what is privatization
selling state owned assets to the private sector
what is deregulation
reducing the amount of regulations facing businesses, reducing their costs and make them more flexible and efficient.
What does reducing income tax do
Increase incentives for people to work harder
What does deregulating labour markets do
Make it easier to hire and fire workers
What does reducing the power of trade unions do
Reduces ability of trade unions to go on strike
What does reducing unemployed benefits do
Encourage the unemployed to take jobs
What is collusive behaviour
When firms enter into agreements to fix prices and or output it is illegal
what are the 4 types of supply-side policy
deregulation, privatization, subsidies and training
What is austerity
increases in taxes or cutting government expenditure in order to reduce a budget deficit
How can a government reduce a budget deficit
increase taxes, reduce government expenditure, increase economic growth
Why is austerity needed
- Demand pull inflation may be occurring
2. National debt may be rising to dangerous levels
When is fiscal policy sucessful
- Economy is at low levels of AD
- Fiscal multiplier is relatively high
- There is crowding in effect (G increases AD, real GDP increases causing accelerator)
What is the fiscal multiplier
Ratio of a change in national income arising from a change in government spending
What is crowding out
Increased government involvement in a sector leads to a transfer of scarce productive resources from the private sector to the public sector where productivity may be lower.
What is automatic fiscal policy
Is dictated by automatic fiscal stabalisers, this left to its own devices fiscal policy will determine itself
Why might fiscal policy be unsuccessful
- Economy being close or at Yfe
- Big crowding effect (public sector borrowing squeezes out private sector borrowing - leads to higher interest rates)
- Low fiscal multiplier (may be due to high MPW)
What is the laffer curve
Shows relationship between tax rate and tax revenue
Why do the government set inflation targets
influences expectations of inflation . Therefore households/businesses can plan for that level of inflation , helping to ensure it happens (use phillips curve to show this)
How can the central bank improve competitiveness of UK firms
reduce interest rate, lowering exchange rate meaning cheaper exports (AD right)
What is competition policy
Improves enterprise. Exists to provide a level playing field for businesses, preventing things like predatory pricing, price fixing, cartels and growth of anti competitive monopolies through mergers and takeovers
Investment as a supply side policy
government capital expenditure which targets improving the structure of the UK economy with ambition of shifting LRAS right e.g. infrastructure projects, investment in training, education and apprenticeships. Offers support to companies to engage in R&D.
Reforms of the tax and benefit system as supply side policy
Improving quantity and quality of labour but also capital and enterprise. Incentivizes work by making taxes straightforward and benefits less attractive. More benefits being strictly means tested
Improved labour market flexibility as a supply side policy
workers re in a weaker position compared to employers. Done this by changing trade union laws so they have less power making certain types of industrial action illegal. Caused average wages to have fallen but benefited companies allowing bigger profits to be made.
Immigration control as a supply side policy
Quantity of labour is reduced. Can encourage businesses to invest in quality of labour, encouraging British workers into work, increasing wage level and overall standard of living.
Evaluating the effectiveness of 1)fiscal 2)monetary 3)supply-side policies - duration
1.How long will the budget deficit (longer - worse)
2/3. Time-lag (can take a while to act/How long till it improves)
Evaluating the effectiveness of 1)fiscal 2)supply-side policies - opportunity cost
- National debt (we are paying back £88bn that could be spent on education)
- Of subsidies (what else can the money be spent on)
Evaluating the effectiveness of 1)fiscal 2)monetary 3)supply-side policies - type
- Capital v current expenditure. Progressive v proportional tax
- Lower interest rates or QE (QE benefits wealthier people more)
- Privatisation v deregulation. Investment v reform impacts
Evaluating the effectiveness of 1)fiscal 2)monetary 3)supply-side policies - overseas relativity
- Our tax rate v other countries
- Our interest rate v other countries
- Our subsidies/regulations v other countries
Evaluating the effectiveness of 1)fiscal 2)monetary 3)supply-side policies - economy’s position
- Works in a recession
- Works in a recession (not as quick)
- Work at/near full capacity
Evaluating the effectiveness of 1)fiscal 2)monetary 3)supply-side policies - politicians
- Bias (bribing electorate with promises/incompetence)
- Independent of politicians
- Prone to bias/incompetence
Evaluating the effectiveness of monetary policy -elasticity
Marshall lerner condition
Evaluating the effectiveness of 1)fiscal 2)monetary 3)supply-side policies - size
- Size of tax or cuts
- Size of inflation rate change
- How big are the subsidies
Evaluating the effectiveness of 1)fiscal 2)monetary 3)supply-side policies - unforeseen circumstances
pandemic, Ukraine, Brexit
