Theme 2- Macro Economic Objectives And Policies Flashcards
What is a demand side policy
Any deliberate action taken by the government or monetary authority to shit the aggregate demand curve.
What are the two types of demand side policy and elaborate.
Monetary policy: the manipulation of monetary variables in order to achieve government objectives (by monetary authority).
Fiscal policy: the manipulation of government spending and/or taxation in order to change aggregate demand.
What are the instruments of monetary policy.
Quantitive Easing, Interest rates.
What is quantities easing
BoE purchases bonds from financial institutions like banks and pension companies. As demand for these bonds go up, the yield % relative to the bonds price falls. This money can easily be deleted once bonds are sold by BoE as to avoid inflation / hyperinflation. ESPECIALLY USEFUL SOLUTION TO CREDIT CRUNCH BECAUSE OF THIS.
Use of interest rates as a monetary policy instrument and how they are set and by who.
Interest rates raised means AD falls and shifts left as i and C will fall and vice versa. There are also multiplier effects, which increases impact. Interest rate is set by the Monetary Policy committee and they do this by predicting inflation in 18-24 months as this is when an interest rate change will probably come into effect.
What is the effect of the gov running a fiscal deficit
Government spending is greater than tax revenue, therefore this would increase AD through (G) and has an expansionary effect on AD and with multiplier effects.
What different effects do indirect and direct taxation have
Indirect taxes like VAT would cause a rise in the cost of living and therefore also increase the price level and rate of inflation. This also increases inequality as it takes up a larger proportion of people on lower wages’ income.
Direct taxes might cause lesser productivity due to the lesser incentives to work and earn money.
Draw ad as diagram for quantitative easing
Keynesian supply curve. Ad shifts right as it’s expansionary.
What does the BoE consider when setting interest rates
Spare capacity and predicted output gap, Equity markets and house prices, consumer and business confidence, wage inflation, unemployment, wholesale commodity prices e.g. oil, global exchange markets, international data e.g. growth rates of China and USA as these could contribute to demand pull inflation.
What did the UK do in response to credit crunch 2008 using demand side policies and why some didnt work
MONETARY: As banks couldn’t lend, changing interest rates would not have stimulated investment or consumption, so the BoE used quantitive easing, they bought fixed assets (gov bonds) from mostly banks. This 1, Gave banks the liquidity to lend again and 2, increased the money supply stimulating AD. An inflationary spiral was also avoided as the money could simply be taken out the economy again.
FISCAL: the government cut VAT by 2.5% temporarily and also £145 income tax cut for below basic rate (35,800). Also introduced a £20bn small enterprise loan guarantee scheme.
Demand side policy use in the USA to fix Great Depression
Roosevelt’s ‘New Deal’ increased gov spending on infrastructure and employing people in conservation and construction massively. The USA also introduced the protectionist policies like the Smoot-Hawley Tariff Act 1930.
Strengths of demand side policies
- Demand side policies are the only way to get a country out of demand-deficient unemployment and stagnation in short run.
- If multiplier is large, can have significant impact.
- If there is spare capacity the economy will grow fast.
4, can be used to stop demand pull inflation.
Weaknesses of demand side policies
- Expansionary demand-side policies only cause inflation in long run.
- Multiplier could be low causing minor impacts.
- if there isn’t spare capacity then supply side policies are needed.
- The gov could end up running a huge deficit which adds to national Debt and can become unsustainable e.g. Greece from 2009.
What are the 7 possible macroeconomic objectives ( 4 are must know)
1 economic growth.
2 low and stable rate of inflation.
3 balance of payments current account equilibrium, avoid large current account deficit.
4 low unemployment- full employment is aim (includes natural rate of unemployment)
Less important: 1 balanced gov budget
2 protection of environment
3 greater income equality
What does the Lorenz curve show and what is the gini coefficient
A graphical representation of income distribution. Draw it. The area between the equal distribution line and the Lorenz curve is the Gini coefficient, this is a numerical measure of income inequality and the closer to 1 the more unequal. In 2017 the UK’s was 0.36.
