Topic 2 Flashcards
Economic policy and financial regulation
What are macroeconomic objectives?
Macroeconomic objectives concern the overall economy and include key targets such as inflation control, low unemployment, balance of payments equilibrium, and satisfactory economic growth. These differ from microeconomic objectives, which focus on individual firms or consumers.
What is inflation?
The sustained increase in the general level of prices of goods and services, often caused by too much money in the economy relative to the number of goods and services available.
What is disinflation?
A fall in the rate of inflation; prices are still rising, but at a slower pace than before.
What is deflation?
The general fall in the price of goods and services, leading to a negative inflation rate (below 0%).
What are the four key macroeconomic objectives called?
Price stability
Low unemployment
Balance of payments equilibrium
Satisfactory economic growth
What does price stability mean?
Maintaining a low and controlled rate of inflation, not necessarily zero inflation. Some believe moderate inflation can stimulate investment and benefit the economy.
What does low unemployment aim to achieve?
Expanding the economy so that there is more demand for labour, land, and capital, leading to higher employment rates.
What is balance of payments equilibrium?
When the expenditure on imports and investment income going abroad equals the income received from exports and overseas investments.
What is satisfactory economic growth?
When the economy’s output grows in real terms over time, leading to higher living standards.
Why is it difficult to achieve all economic objectives at once?
Because policies to reduce unemployment may lead to higher inflation, while efforts to reduce inflation could harm growth and balance of payments. Governments often face trade-offs between these objectives.
What is recession?
A significant decline in economic activity over a sustained period, typically defined as two consecutive quarters of negative GDP growth.
What is Gross Domestic Product (GDP)?
The monetary value of all goods and services produced within a country over a specified period, such as one year.
What are the four phases of the economic cycle?
Recovery and expansion
Boom
Contraction or slowdown
Recession
What happens during the recovery and expansion phase?
Interest rates, inflation, and unemployment are low. Consumers spend more, driving up demand and prices, while share prices improve as businesses thrive.
What happens during the boom phase?
The economy reaches its peak. To prevent overheating, the Bank of England may increase interest rates to control consumer spending and inflation.
What happens during contraction or slowdown?
Interest rates rise, causing consumer spending to fall. This leads to a decrease in demand for goods and services, reduced profits, and higher unemployment, while inflation slows down.
What happens during a recession?
The economy reaches its lowest point. The Bank of England may reduce interest rates to stimulate demand and help the economy recover.
What is the ‘stop-go’ approach to economic policy?
The ‘stop-go’ approach was used by the UK from the 1960s to the 1990s, where the government alternated between periods of expansion and contraction, leading to fast growth followed by slowdowns with high unemployment and lower inflation.
What is the target inflation rate in the UK?
The UK government aims to keep inflation, as measured by the Consumer Prices Index (CPI), at an average annual rate of 2%, with a divergence of no more than ±1%.
How does the government control inflation?
By manipulating interest rates to adjust aggregate demand in the economy.
What are the two major types of economic policy?
Monetary policy – manipulating interest rates and money supply
Fiscal policy – adjusting government spending and taxation
What is the Consumer Prices Index (CPI)?
Measures the change in the price of a ‘basket’ of consumer goods and services over a period, providing an indication of inflation.
What do monetary economists believe is the cause of inflation?
Monetary economists believe inflation is caused by an increase in the money supply, particularly due to the growth of credit created by banks.
How can a government control the growth of the money supply?
By controlling the amount of credit created by banks, typically through interest rates.
