Theme 2:2.6 Macroeconomic objectives and policies Flashcards
7 government objectives
-economic growth
-low and stable inflation rate
-low unemployment
- balance of payments equilibrium on current account
-balanced government budget
- protection of the environment
- greater income equality
what is fiscal policy?
fiscal is the changes to gov spending an taxation in order to influence AD
what is monetary policy?
monetary policy is the use of interest rates and money supply by the central bank to influence AD.
what is expansionary monetary policy and why is it used?
factors in order to increases AD:
-increase inflation
-increase growth
-reduce unemployment
what is contractionary monetary policy and why is it used?
factors in order to decrease AD:
-decrease inflation
-prevent asset
-reduce excess debt
-reduce current account deficit
what is expansionary fiscal policy and why is it used?
factors in order to increase AD:
-boost growth
-reduce unemployment
-increase inflation
-redistribute income
what is contractionary fiscal policy and why is it used?
factors in order to decrease AD:
-reduce inflation
-reduce current account deficit
-redistribute income
-reduce budget defit
diagram for expansionary monetray policy
diagram for expansionary fiscal policy with multiplier effect
effect of expansionary monetary policy
-cheaper borrowing-less saving-more consumption
-increases disposable income-less interest spent on mortgages
examples of expansionary fiscal policy.
-reduce income tax
-reduce corporation tax
-increases gov spending
possible side effect of expansionary fiscal policy
can affect LRAS as reduced income tax increases labour supply for example.
Gov spending on education can boost productivity
LRAS will shift to the right
quantitative easing?
buying assests in exchnage for money
when does quantitative easing occur ?
when interest rates are too low and a further reduction will not have an affect in AD
steps in quantitative easing.
-central bank creates money electronically
-central bank uses money to buy financial assets from financial institutions e.g. gov bonds from a bank
-financial institutions have excess money and can lend it out with low interest rates
-more credit available for consumers
problems with monetray policy
-can cause balance of trade deficit if exchange rates decrease and pound depreciates
-interest rates so low they can’t be reduced
-not all interest rates affect by BoE base rate
–high interest rate reduce investment
problems with QE
-can cause high inflation or hyperinflation
-caused rapid price increases in the housing market
government budget fiscal deficit vs surplus
deficit is when money spent by gov is greater than what was received
surplus is when spent is less than what was received
direct tax
taxes paid directly to the government by the tax payer.
indirect tax
taxes on the consumption of a good which has been imposed on the seller.
25%
the amount of indirect tax which makes up the gov tax revenue in the UK.
20%
the standard rate of VAT in the UK
45%
the additional rate of income tax for incomes over £150,000 in the UK
problems with fiscal policy.
- high taxes reduces incentives to work and whilst working
-impact of fiscal policy depends on the mutiplier
-taxes can impact inequality
BoE role MPC
monetary policy committee control the monetary policy and oversee important decisions e.g. what to set base rate
Aim of the MPC
to keep inflation at 2%
if inflation is less than 1% or more than 3%?
the BoE have to write a letter to the chancellor of the Exchequer and explain why it happened and what they’re doing to get it to the target rate
cause of the Great depression
loss of conumer and business cofidence: shareholders lost moeny in the crash and that would reduce investment in the economy and then reduce AD
US response to the great depression
Franklin Roosevelt was elected in 1932 with his New Deal which promised
public sector investment, work schemes for the unemployed and fiscal stimulus.
unemployment rates in UK and US due to Great depression
UK-15%
US-25%
UK response to Great depression
introduced an emergency budget which cut public sector wages and
unemployment benefit by 10% and raised income tax from 22.5% to 25%. This reduced AD at a time when it needed to be increased.
and to balance government budget
cause of the 2008/9 financial crisis
lack of regulation:loans were given to people with poor credit and also the sales of risky mortgages
US and UK response to 2008/9 crisis
forced to nationalise banks and building societies and guarantee savers their money in order to avoid chaos and a collapse of the banking system.
-expansionary monetary policies e.g. QE and lowered interest rates.
