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Macro > The application of macro-economic policy instruments and the international economy > Flashcards

The application of macro-economic policy instruments and the international economy Flashcards

1
Q

What is fiscal policy?

A

The taxation and spending decisions of a government

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2
Q

What are the three policies governments use to influence economic activity?

A
  • Fiscal
  • Monetary
  • Supply-side
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3
Q

What is the key aim of fiscal policy?

A

To influence AD

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4
Q

What can the government do to tax? (fiscal policy)

A
  • change tax rates
  • change the type of taxes it imposes
  • what it taxes
  • the amount, composition and timing of government spending
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5
Q

What are rises in government spending and cut in taxes designed to increase AD referred as? (fiscal policy)

A

Reflationary (expansionary, or loose fiscal policy)

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6
Q

Define reflationary (fiscal policy)

A

Of policy measures designed to increase aggregate demand

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7
Q

What policy involves measures that reduce AD?

A

Deflationary (contractionary or tight fiscal policy)

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8
Q

Why might changes in govt. spending and taxation be implemented? (fiscal policy)

A
  • influencing the level of AD
  • encouraging the consumption of merit goods and discouraging the consumption of de-merit goods
  • altering the distribution of income
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9
Q

What is discretionary fiscal policy?

A

Deliberate changes in govt. spending and taxation designed to influence AD

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10
Q

What are automatic stabilisers? (fiscal policy)

A

Forms of government spending and taxation that change automatically to offset fluctuations in economic activity

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11
Q

What is progressive tax?

A

A tax that takes a higher percentage from the income of the rich

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12
Q

What is regressive tax?

A

A tax that takes a greater percentage from the income of the poor

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13
Q

What is the single most important source of tax revenue in the UK?

A

Income tax

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14
Q

What is the second most important source of tax revenue in the UK?

A

VAT (value added tax)

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15
Q

What type of tax is income tax?

A

Direct and progressive (as a person’s income rises, both the amount and the percentage that a person pays in tax rises)

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16
Q

What type of tax is VAT?

A

indirect and regressive (food, children’s clothing, prescriptions medicines, books and newspapers)

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17
Q

What type of tax is excise duty?

A

Indirect tax, imposed on specific products (alcohol, tobacco and petrol)

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18
Q

What can government spending be divided into?

A
  • capital expenditure (hospitals, schools and roads)
  • current spending (teachers pay, purchase of meds in NHS)
  • Transfer payments (Taxpayers to benefits, ((pensioners and unemployed))
  • Debt interest payments
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19
Q

What are the five most important individual areas of govt. spending been in the UK recently?

A
  • social protection, health, education, defence and debt interest
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20
Q

What is expenditure on health and education affected by?

A
  • government policies and priorities

- changes in the age composition of population (UK ageing population putting upward pressure on govt. spending on health

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21
Q

Why would defence spending be high recently in the UK?

A
  • The UK’s military involvement in Iraq and Afghanistan
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22
Q

When does a balanced budget occur?

A

When govt. spending and tax revenue are equal

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23
Q

When does a budget deficit arise?

A

When govt. spending exceeds tax revenue

24
Q

When does a budget surplus occur?

A

When tax revenue is greater than govt. spending

25
Q

What are both fiscal and monetary policies often referred as?

A

demand-side policies (as they both seek to influence AD)

26
Q

What is monetary policy?

A

a

27
Q

What does monetary policy measure?

A
  • The rate of interest
  • The money supply
  • The exchange rate
28
Q

What will a higher interest rate cause? (monetary policy)

A
  • reduce consumption
  • lower firms investment
  • encourage foreigners to place more money into UK financial institutions because of their higher return
    (This rise in demand for pounds will push up the value of the pound)
29
Q

What will a higher exchange rate do to the price of exports and imports? (monetary policy)

A
  • Make exports more expensive

- Make imports cheaper

30
Q

What will a rise in the interest overall do? (monetary policy)

A

decrease AD

31
Q

Why might an increase in money supply influence AD? (monetary policy)

A

If the govt. prints more money, or makes it easier for banks to lend more money, people will have more money to spend

32
Q

What is the relationship between a rise in the money supply and interest rates? and why? (monetary policy)

A

They are inversely related

This is because a rise in the money supply, by increasing the amount that banks have to lend, reduces the interest rate

33
Q

Who sets the rate of interest?

A

The Monetary Policy Committee

34
Q

What is the govt. target rate of annual inflation rate?

A

2 percent

35
Q

What do supply-side policies aim to do?

A

influence aggregate supply (ALWAYS increasing AS)

36
Q

Name some supply-side policies

A
  • Education and training
  • Reduction on direct taxes
  • Govt. assistance to new firms
  • National minimum wage
  • Reduction in unemployment benefit
  • Reduction in other benefits
  • Privatisation
  • Deregulation
37
Q

Why will improving education and training increase AS? (supply-side)

A
  • should raise occupational mobility of labour and labour productivity. If output per worker increases, the potential output of the economy will rise (shifting the AS curve to the right)
38
Q

How could a govt. help new firms? (supply-side)

A
  • provide grants

- charging a low rate of corporation tax

39
Q

Why might a reduction in taxes increase AS? ( supply-side )

A
  • Lower direct taxes increase incentives to firms, workers and potential workers
  • A cut in corporation tax will increase both the funds that firms have available to invest and the return from any investment undertaken
    (If investment does increase, the productive capacity of the economy will rise)
  • A cut in income tax may encourage existing workers to work overtime, be more willing to accept promotion, stay in the labour force longer
40
Q

Why will a reduction in unemployment benefit inc AS? (supply-side)

A

A reduction in job seekers allowance will widen the gap between income from employment and the benefit - forcing some of the unemployed to seek work more actively and to accept unemployment at lower wage rates (THIS reduces a negative output gap and move output closer to full capacity)

41
Q

What is the downfall of reducing unemployment benefits? (supply-side)

A

It may increase unemployment. If the unemployment is of a cyclical nature, there will be no jobs available for the unemployed. Cutting their benefits will reduce consumption. This in turn will lower AD and cause firms to cut back their output and make workers redundant.

42
Q

Why will deregulation increase AS?

A

(removal of rules and regulations that affect firms - may give firms greater freedom to make their own decisions and increase competition by making it easier for new firms to enter the industry)

43
Q

What are the drawbacks to fiscal policies?

A
  • changes in government spending and tax rates take time to have an effect on the economy
  • fiscal policy instruments need to be based on accurate information
44
Q

What are the drawbacks of monetary policy?

A
  • MPC may overestimate the prospect of inflation and so keep the interest rate too high and limiting economic growth
  • Takes time for an interest rate change to work through the economy
45
Q

What are the drawbacks of supply-side policies?

A
  • Increasing the productive potential of an economy on its own, will not be sufficient in raising economic performance if there is a lack of AD (extra capacity would not be used.
  • Some policies may take a relatively long time to take effect, they can be expensive and have no guarantee they will work
46
Q

What are some possible conflicts between policy objectives?

A
  • The MPC may face a conflict when setting the interest rate. It may want to increase the interest rate to reduce inflationary pressure but be concerned about the effect such a move will have on the exchange rate and so on the balance of payments and employment
47
Q

What are the advantages that may be gained from international trade?

A
  • enables the country to specialise as the products it does not produce it can import
  • consumers can benefit from the lower prices and higher quality that results from a higher quality that results from the higher level of competition that arises from countries trading internationally (and greater variety)
48
Q

What challenges does international trade bring to countries?

A
  • Competition for other countries and access to their markets results in some industries contracting and some expanding (this requires the shifting of resources, which can be unsettling and may be difficult to achieve due to, occupational immobility of labour)
49
Q

When does international free trade occur?

A

When there are no restrictions imposed on the movement of goods

50
Q

What is protectionism?

A

the protection of domestic industries from foreign competition

51
Q

Why might a government place restrictions on imports?

A
  • certain undesirable products may be imported
  • the continued existence of new and strategic industries may be threatened
  • other countries may not engage in fair competition
52
Q

What methods of protectionism are there?

A
  • Tariffs
  • Quotas
  • Embargoes
53
Q

What are tariffs? (also known as customs duties or import duties)

A
  • taxes on imported products (to raise prices for domestic consumers and shift demand from imports to domestically produced products)
54
Q

What is a quota? What is the effect of a quota?

A

A limit on the supply of a good or service - can be imposed on exports
The effect is to reduce supply - this is likely to push up price

55
Q

What are embargoes?

A

A ban on the export or import of a product and/or a ban on trade with a particular country

Macro (7 decks)

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