Thatcherism Flashcards
Who did thatcher follow in economic thought?
Hayek and Friedman
Monetarism
She gave overriding priority to the control of inflation through the management of money supply whilst also maintaining budget discipline
What were economic conditions like when thatcher came to power?
There was double digit inflation and high unemployment
How did thatcher deal with inflation and unemployment?
- A combination of deficit reduction and tight money. High interest rates pushing up sterling, thus curbed inflation through lower import prices.
- tax cuts from 83% to 60% for top earners
- deregulation of markets, moved controls on exchange rate so it can float freely.
- privatisation
What was the main way thatcher tried to influence aggregate demand
Through monetary policy
In attempting to reduce inflation what was sacrificed?
Lost output and unemployment, the hit was larger than expected
Why was keeping inflation low key for thatchers policies?
She advocated policies such as privatisation and deregulation to free up markets and allow the market mechanism to give consumers all the information they need. If inflation distorts the price signals then it undermines the role of price signals
Natural rate hypothesis
There is a natural rate of employment and this can be increased by supply side policies such as policies in training and innovation. Demand management policies can only help in the SR and therefore demand management should be used to keep inflation low whilst focusing on supply side policies.
First welfare theory
If there are lots of well informed consumers and if prices are free to adjust with plenty of competition between producers then the free market will deliver an efficient outcome. This means no one else can be made better off without making someone else worse off
What is a problem with the first welfare theory?
It doesn’t take into account whether the distribution of welfare is “fair”. There are market failures often involving monopolies, externalities and public goods which require government intervention
In what direction does the long run aggregate labour supply curve slope?
Vertically
Which of the following is not an assumption that the natural rate hypothesis is based on?
A)firms suffer from money illusion
B)that expectations adjust gradually to surprises but are eventually correct on average
C) that firms and workers are able to see through general wage and prices increases and care only about relative price wages
D) that wages adjust quickly to bring the supply and demand for labour into line
A)firms suffer from money illusion
