Theme 2- Macroeconomic objectives and policies (key terms) Flashcards
Central bank policy interest rate
Also known as the monetary policy rate, it is the official lending rate for loans set by a nation’s central bank e.g. the Bank of England or the European Central Bank
Cyclical budget (fiscal) deficit
The size of the deficit is influenced by the state of the economy: in a boom, tax receipts are relatively high and spending on unemployment benefit is low
Demand-side policies
Policies to change the level of AD in the economy
Fiscal policy
Policies that change the level of public spending, taxation or borrowing in order to manage the level of AD
Expansionary fiscal policy
Tax cuts, spending increases designed to boost AD
Contractionary fiscal policy
Tax rises/ spending cuts designed to reduce AD
Government bonds
The government sells bonds to pay for its borrowing
Automatic stabilisers
- Automatic fiscal changes as the economy moves through stages of the business/trade cycle
- When the economy goes into recession, government spending will rise automatically - public spending will go up because unemployment benefits increase, tax revenue falls
Discretionary fiscal policy
The government deliberately decides to change taxes or spending to boost or slow down the economy - discretion means it’s an actual government decision, not an automatic change
Direct tax
Taxes levied on streams of income and profits such as income tax and corporation tax
Excise duties
Indirect taxes levied on specific goods, typically alcoholic beverages, tobacco and fuels.
Expansionary monetary policy
Interest rate cuts which boost AD
Contractionary monetary policy
Interest rate rises which reduce AD
Expansionary monetary
policy (relaxation)
A relaxation of monetary policy means an attempt to use an expansionary monetary policy to boost AD, output and jobs –includes lower interest rates.
Expenditure-switching policies
Policies that are designed to ‘switch’ expenditure from imports to domestically produced goods in order to improve the balance of payments and stimulate GDP
Fine-tuning
Changes in monetary policy or fiscal policy designed to gradually manage the level of AD and prices e.g. small changes in policy interest rates / taxation
Austerity
Economic policy aimed at reducing a government’s deficit (or borrowing) - can be achieved through increases in government revenues -primarily via tax rises -and/or a reduction in government spending or future spending commitments
Fiscal austerity or fiscal tightening
Fiscal austerity refers to decisions by a government to reduce the amount of borrowing (i.e. cut the size of a fiscal deficit) over time
Marginal rate of tax (MRT)
The rate of tax on the next unit (£1) of income earned
Monetary policy
Decisions made by the Bank of England that change the money supply and interest rate to influence output, employment, and prices
Monetary Policy Committee (MPC)
Bank of England committee of nine people (including the Governor) that meets every month to review the economy and set monetary policy interest rates for the UK
Inflation target
2%, plus or minus one - measured on the CPI, symmetrical target
Office of Budget Responsibility
The OBR is a non-departmental public body funded by the Treasury, that the UK gov established to provide independent economic forecasts and independent analysis of the public finances
Patent box
A reduced rate of Corporation Tax applied to profits from patents –designed to stimulate research and innovation and improve the supply-side of the economy