Theme 2 - macroeconomic objectives and policies Flashcards
What is the difference between monetary and fiscal policy?
Monetary involves using interest rates and quantitative easing as a way to increase AD whereas fiscal uses the manipulation of government spending and taxation to increase AD
How is quantitative easing used?
Quantitative easing is when the government aims to increase money supply so they buy financial assets from commercial banks decreasing cost of borrowing and decreasing interest rates, AD shifts to the right. This then causes government bonds to increase in demand as it is a substitute for saving which decreases yield. Govt benefit and can increase govt spending
How does a change in interest rates occur and why?
The BofE has a base rate which must be maintained. If there was a period of high inflation, the MPC would set out to increase interest rates to reduce consumption so price levels become stable and inflation doesn’t increase further
When was quantitative easing first implemented and why?
After the 2008 financial crisis when the lowering of interest rates from 5.75% to 0.5% failed. One reason to why this happened was a decrease in confidence for the future so quantitative easing was used to encourage consumer and business spending.
What is the difference between contractionary and expansionary fiscal policy?
Expansionary is when there has been an decrease in interest rates causing consumers to increase borrowing so AD shifts out. Contractionary is when there has been an increase in interest rates so consumers borrow less so Ad shifts in
How does government spending change automatically in a boom or recession?
The use of automatic stabilisers is used to regulate the trade cycle to help manage govt spending. In a boom, government spending decreases such as JSA decreasing as more people are employed. In a recession govt spending on JSA increases as less people are unemployed so have less income
Fiscal policy impacting taxes
Expansionary fiscal policy shows that taxes will decrease especially income tax so people will have more disposable income. The opposite happens for contractionary fiscal policy.
Explain the difference between a budget deficit and a budget surplus
Budget deficit is when there is more government spending that tax revenues and a budget surplus is when there is more tax revenues than government spending
What is the distinction between taxes that individuals must pay?
Direct - paid straight to the government from consumers or producers such as income tax
Indirect - a tax added onto a specific good that then gets fed back to the government.
Why are supply side policies used?
To improve the productive potential of an economy and shift LRAS rightwards
What are the 6 key objectives of supply side policies?
- Prompt non-inflationary pressure
- promote competition
- increase labour and capital productivity
- increase investments and research
- improve incentives
- increase mobility
What are the 5 free market supply side policies?
Deregulation, income tax, corporation tax, privatisation and trade union power
What is meant by Trade union power and how does it improve LRAS
Trade union power reduces restrictions and legislation on workers. This means that firms have more control over who they hire and fire as workers are less protected. This could incentivise workers to increase productivity because of the increased risk of unemployment. Increases Quality or labour
What is meant by deregulation and how does it improve LRAS.
Deregulation is the removal of restrictions. It can increase competitiveness because it removes barriers to entry for new companies to enter a market. This could decrease prices and firms are profit maximisers and so want demand to increase,
What is income tax and how does it improve LRAS
income tax is a percent paid by workers to the government. A decrease in this increases disposable income which can increase quality of labour as this is an incentive to workers to increase productivity. It also increases quantity because people on JSA for example may benefit more from working as they pay less tax,
What is meant by privatisation and how can it improve LRAS?
This is when a public sector assets becomes privately owned. This is good because it increases the efficiency of the allocation of resources as well as waste minimisation.
However people argue that the NHS are publicly owned and remain the market leader for healthcare.
What are 4 interventionist supply side policies?
Subsidies, education and training, home building and infrastructure
How might home building shift LRAS?
Building more homes increases the supply of houses which will reduce prices due to reduced scarcity. This could then increases affordability for housing and allow people to move across the UK. This will then reduce geographical immobility
How might infrastructure shift LRAS?
Increase in investments such as HS2, cross rails and broadband projects allows better transportation of goods and services as well as transporting labour more efficiently reducing geographical immobility
How could supply side policies improve the balance of payments
If output increases and there is a decrease on inflationary pressure, this could make goods and services more competitive. This may cause consumers to buy more domestic goods and cause foreigners to buy more UK goods. This may reduce imports and increase exports which leads to an improvement on the current account deficit.
What are the 6 conflict of objectives
- decreasing inflation leads to a decrease in economic growth
- A decrease in unemployment may cause demand-pull inflation
- Increasing growth can lead to increases current account deficit
- Increased government spending increases budget deficit
- Increases growth decreases quality of environment
- Higher growth leads to higher inequality
