Theme 2: The UK economy – performance and policies Flashcards
What are the strengths and weaknesses of supply-side policies? (2.6.3)
Strengths:
- Increases economic growth trend rate
- Reduces inflation through lower firm costs
- Directly targeted structural unemployment reduction
- Interventionist shift AD right
Weaknesses:
- Time lags
- Ineffective on consumer confidence
- Little impact on negative output gap, AD increase required
- Inequality / exploitation when market-based
What interventionist supply-side policies exist? (2.6.3)
- Stricter competition policy (promoting competition in non-competitive markets)
- Subsidising labour mobility
- Subsidising training / education (improving skills, lowering firm costs)
- Spending on healthcare (improving labour quality, higher productivity)
- Bettering infrastructure
What market-based supply-side policies exist? (2.6.3)
- Reducing tax encouraging investment
- Deregulating / privatising (increasing competition / efficiency)
- Reforming labour market (allocating wages without NMW, reducing trade union
power, increasing labour mobility)
What does the Phillips curve diagram look like? (2.6.4)
No back content
What potential trade-offs and conflicts exist between macroeconomic objectives?
(2.6.4)
- Economic growth & stable inflation rate (demand-pull)
- Economic growth & stable BoP (AD 🡅, imports 🡅)
- Reducing budget deficit & economic growth (AD 🡇)
- Economic growth & environment (externalities)
- Low unemployment & stable low inflation (LRPC)
- Economic growth & reducing inequality
What caused, and what were the economic policies employed during, the Great
Depression and Global Financial Crisis of 2008 each? (2.6.2)
Great Depression:
- Falling output, deflation, high unemployment
- Expansionary fiscal policy (stimulates AD)
Global Financial Crisis:
- Credit provided too liberally, defaults on debt
- Keynesian fiscal policies used
What is the role of the Monetary Policy Committee? (2.6.2)
- Makes decisions on Bank Rate (base interest rate)
- Influences other interest rates, therefore economy
- Controls inflation
How does quantitative easing work? (2.6.2)
- Central bank creates electronic money
- Bonds bought back from financial institutions
- Bond price 🡅, yields 🡇 (as coupon / market price)
- Consumers / firms borrow more
- Spending rises, jobs created
- AD rises, economic growth
What are possible macroeconomic objectives? (2.6.1)
- Economic growth
- Low unemployment
- Low, stable inflation rate
- BoP equilibirum on current account
- Balanced government budget
- Protection of environment
- Greater income equality
What are the benefits and costs of economic growth? (2.5.4)
Benefits:
- Higher wages / incomes
- Lower unemployment
- Increased tax revenue
- Increased life quality
- Improved education
- Improved BoP on current account
Costs:
- High inflation
- Negative externalities (pollution?)
- Imports 🡅, BoP deficit 🡅
What are the characteristics of booms and recessions? (2.5.3)
Boom:
- Full employment
- High AD
- High tax revenues
- Rising wages
- Rising imports
- Demand-pull
Recession:
- High unemployment
- Low AD & imports
- Low business profits
- Rise in welfare benefits
- Low inflation
What is a positive and negative output gap? (2.5.2)
Positive: actual output greater than trend output
Negative: actual output below trend output
What is the marginal propensity to withdraw and what is it made of? (2.4.4)
Proportion of extra income withdrawn from economy.
Made of:
- MPS (increase in saved income)
- MPT (increase in taxed income)
- MPI (increased in import spending)
MPW + MPC = 1
What is the multiplier effect and how is it calculated? (2.4.4)
Impact on AD of any investment in economy, continues until withdrawn from
circular flow.
Multiplier=1 / (1-MPC)
What are injections and withdrawals into the circular flow of income? (2.4.2)
Injections: non-household inflows (I+G+X)
Withdrawals: firm / household outflows (imports, savings, taxes)
