Top 2 Flashcards
What are macroeconomic objectives?
Macroeconomic objectives are goals that concern the economy as a whole, focusing on economic aggregates.
How do political beliefs influence economic objectives?
- Political beliefs shape the methods governments use to achieve economic objectives AND;
- Determine the importance given to each goal.
How do macroeconomic objectives differ from microeconomic objectives?
MACROeconomic objectives focus on the economy as a whole;
While MICROeconomic objectives deal with individual firms or consumers.
Definition of inflation
A sustained increase in the general level of prices of goods and services.
I.e., ‘Too much money chasing too few goods’
Meaning of disinflation
a DECREASE in the rate of inflation.
i.e., Prices are still rising, but less quickly; From +5% to +3% is a 2% disinflation.
What is meant by deflation
A general fall in the price of goods and services.
In other words, the inflation rate is below 0% - a NEGATIVE inflation rate, such as -2%.
What are the key macroeconomic objectives
- Price stability
- Low unemployment
- Balance of payments equilibrium
- Satisfactory economic growth
What does price stability as a macroeconomic objective involve?
Price stability involves maintaining a low and controlled rate of inflation.
While zero inflation is not necessarily desirable, moderate inflation can stimulate investment, which benefits the economy.
How does the objective of low unemployment relate to economic expansion?
Low unemployment involves:
- EXPANDING the economy;
- which INCREASES demand for labor, land, and capital;
- thereby REDUCING unemployment levels.
What is meant by balance of payments equilibrium?
Balance of payments equilibrium occurs when expenditure on imports and investment income going abroad is balanced with income from exports and overseas investments.
It is closely linked to maintaining a stable exchange rate.
How is satisfactory economic growth defined as a macroeconomic objective?
Satisfactory economic growth means that the economy’s output is increasing in real terms over time, leading to higher standards of living.
Why is maintaining a stable exchange rate important for a balance of payments equilibrium?
A stable exchange rate prevents the currency from becoming too expensive, which would discourage exports, or too cheap, which could increase inflation.
Why is it challenging to achieve all key macroeconomic objectives simultaneously?
Achieving all key macroeconomic objectives simultaneously is difficult because actions taken to improve one objective can negatively impact others.
For example, reducing unemployment through expansionary measures can lead to higher inflation and a worsening balance of payments.
What are the potential consequences of using expansionary measures to reduce unemployment?
Using expansionary measures such as lower interest rates and taxes to reduce unemployment can:
- Increase demand for goods and services;
- leading to higher inflation AND a negative impact on the balance of payments.
How are the four macroeconomic objectives grouped into pairs?
The objectives are grouped into two pairs:
- Policies that reduce unemployment tend to also boost economic growth.
- Measures to reduce inflation tend to improve the balance of payments.
What trade-off do governments OFTEN face when trying to manage price stability and unemployment?
Governments often trade off between price stability and unemployment, accepting a low rate of inflation to avoid causing high unemployment and pushing the economy into recession.
Meaning of recession
A significant decline in economic activity over a sustained period.
Technically, it is 2 CONSECUTIVE quarters of NEGATIVE GDP growth
What is Gross Domestic Product?
GDP is a measurement of a country’s overall economic activity.
Technically, it is the monetary value of all goods and services produced within the country in a given period.
What are the four main phases that economies typically go through?
(In chronological order)
- Recovery and expansion
- Boom
- Contraction OR Slowdown
- Recession
How is economic activity measured in an economy?
Economic activity is measured by the rise and fall in GDP
What does it mean when an economy is in the recovery or expansion phase?
The economy is in recovery or expansion when GDP is rising.
When is an economy considered to be booming?
An economy is considered to be booming when GDP is at its highest level.
What indicates that an economy is contracting or slowing down?
The economy is contracting or slowing down when GDP in ONE QUARTER falls compared to the previous quarter.
What signals that an economy is in recession?
An economy is in recession when there are two successive quarters of declining GDP.
What characterises each phase of the economic cycle?
Each phase of the economic cycle is characterized by fluctuating patterns of economic activity.
What happens during the recovery and expansion phase of the economic cycle?
- Interest rates, inflation, and unemployment are low.
- Increased consumer spending raises demand for goods and services, pushing prices up and improving share prices as businesses flourish.
What does the Bank of England do during the boom phase to prevent the economy from overheating?
The Bank of England may raise interest rates to control consumer spending and dampen inflation.
What occurs during the contraction or slowdown phase of the economic cycle?
- As interest rates INCREASE, consumer spending and demand for goods and services DECREASE…
…leading to:
- Decreased profits and share prices;
- Higher unemployment
- Slower inflation.
What happens during a recession, and how might the Bank of England respond?
During a recession, economic activity declines significantly.
The Bank of England may DECREASE interest rates to STIMULATE DEMAND and help the economy recover.
How was economic policy approached in the UK from the 1960s to the 1990s?
The approach was known as ‘stop-go,’ with governments alternating between accelerating and decelerating the economy, leading to cycles of fast growth and high inflation followed by slowdowns with high unemployment.
What is the current approach to economic policy in the UK and Europe since the 1990s?
The focus has been on:
- Maintaining low and steady inflation to provide economic stability
- Promote sustained growth, aiming to align aggregate demand with the economy’s productive capacity.
What is the UK’s official target for inflation?
The target is an average annual inflation rate of 2%, WITH a permissible deviation of ±1%.
What is the main method used by the UK to control inflation?
Manipulating interest rates
What are the two major types of economic policy used by governments to achieve long-term objectives?
- Monetary policy
- Fiscal policy
How do fiscal AND monetary policies relate to each other?
They are closely linked and often used together to influence:
- Aggregate demand
- Output
- Unemployment
- Prices
What is a measure of the change in price of a ‘basket’ of consumer goods and services over time, and how is it reviewed?
Consumer Price Index (CPI)
What is monetary policy?
Measures taken to control the supply of money in the economy AND manage inflation BY raising or lowering interest rates.
What is the common belief among monetary economists regarding the cause of inflation?
Monetary economists commonly believe that inflation is caused by an increase in the money supply.
How is the growth in the money supply primarily achieved according to monetary economists?
The growth in the money supply is primarily achieved through an increase in the amount of credit created by banks.
What is a common method used to control the growth of the money supply and thus manage inflation?
A common method is manipulating interest rates, which influences the demand for credit by customers.
Why is controlling the amount of credit created by banks important for managing inflation?
Controlling the amount of credit is important because it helps regulate the money supply, which in turn affects inflation rates.
Besides manipulating interest rates, what are other methods used to control the money supply?
Other methods include imposing restrictions on the amount that banks can lend and requiring borrowers to provide a minimum cash deposit when making a purchase.
What is one example of a restriction that can be imposed on banks to control the money supply?
One example is imposing limits on the amount that banks can lend.
How can requiring a minimum cash deposit from borrowers help manage the money supply?
Requiring a minimum cash deposit reduces the amount of credit available for borrowing, thereby controlling the growth of the money supply.
What is the current primary method used in the UK to control the money supply?
The primary method used in the UK is the manipulation of interest rates.
Who decides on the official Bank rate in the UK?
The Monetary Policy Committee (MPC)
How does the Bank rate affect interest rates for borrowers and lenders?
The Bank rate determines all other interest rates charged to borrowers and paid to lenders.
Can the Treasury influence monetary policy in the UK?
(Explain)
Yes.
Treasury can give instructions to the Bank of England regarding monetary policy in “extreme economic circumstances.”
Otherwise, the Bank acts independently.
What is the Bank Rate?
The Bank Rate is the rate at which the Bank of England lends to other financial institutions.
How does the Bank Rate impact financial institutions?
The Bank Rate affects the cost of borrowing for financial institutions, which in turn influences interest rates for borrowers and lenders in the wider economy.
What is an inflation target?
An inflation target is the level of inflation deemed appropriate to keep the national economy functioning efficiently.
What is the current inflation target in the UK?
The current inflation target in the UK is 2%, as measured by CPI, with a MAXIMUM divergence of 1% either way.
