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Economics > 2.6 Macroeconomic Objectives and Policies > Flashcards

2.6 Macroeconomic Objectives and Policies Flashcards

1
Q

What is the UK target economic growth rate and why?

A

2±1%
- considered to be sustainable growth
- less likely to cause excessive demand pull inflation

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2
Q

What is the target unemployment rate for the UK and why?

A

4±1%
- its close to the full employment level of labour
- there will always be a level of frictional unemployment making it impossible to achieve 100% employment

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3
Q

What is the relationship between unemployment and realGDP growth?

A

unemployment is inversely proportional to real GDP growth
- when realGDP increases, unemployment falls
when realGDP decreases, unemployment rises

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4
Q

Why is a low rate of inflation desirable?

A

It is a symptom of economic growth

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5
Q

What are the government responses and what do they do?

A

demand side policies - ease demand pull inflation
supply side policies - ease cost push inflatioin

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6
Q

What is the balance of payments?

A

a record of all the financial transactions that occur between a country and the rest of the world

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7
Q

What is the current account?

A
  • part of the balance of paymentts
  • focusses on financial transactions related to exports and imports of goods/services
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8
Q

What can occur for balance of payments on the current accounts?

A
  • balance of payments equilibrium on the current account
  • if export>imports it will create a current account surplus
  • if imports>exports, a current account deficit is created
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9
Q

What is the trade status in the UK?

A

A deficit
- as a % of GDP the UK current account deficit is insignificant so has not been problematic

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10
Q

What is a government budget?

A

annual forecast made by the government of forecasted revenue and expenditure

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11
Q

What is government revenue?

A

comes from sale of assets, taxes, sales revenue from goods/services

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12
Q

What is governments expenditure?

A

all government spending such as public sector salaries; unemployment benefits; spending on public & merit goods

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13
Q

What does the UK government aim to have their budget as?

A

a balanced budget where expenditure = revenue

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14
Q

What is a budget deficit?

A
  • expenditure > revenue
  • any deficit has to be financed through the public sectors borrowing
  • any borrowing is added to the public sector debt (government debt)
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15
Q

what happens If the UK government debt becomes too high? (As a % of GDP) 3

A

if debt becomes too high
- lenders begin to lose confidence in the governments ability to repay debt
- government then raides the interest rate it offers to lenders
- making borrowing more expensive

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16
Q

How can governments reduce the deficit?4

A
  • cutting public sector pay
  • raising taxes
  • reducing unemployment benefits
  • reducing spending on merit goods
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17
Q

What is the governments aim regarding environmental protection?

A

to reduce emissions by 78% by 2035

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18
Q

What are the UK’s environmental aims including? 3

A
  • focus on sustainability
  • reduction of negative externalities of production
  • 200% energy from renewable sources by 2035
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19
Q

Why is income inequality a problem?2

A
  • high levels of it create social unrest
  • ultimately leading to revolutions
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20
Q

What is income inequality measured using?

A

the Gini coefficient

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21
Q

What do most developed economies have a Gini target of?

A

0.3-0.4

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22
Q

What is wrong with perfect income equality?

A
  • its not desirable as it removes the incentive to work and study
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23
Q

What is the relationship between unchecked capitalism and high income inequality?3

A

unchecked capitalism has a natural outcome of high income inequality
- the wealthy are able to keep buying factors of production
- the concentration of ownership becomes more and more narrow with fewer individuals owning the bulk of the worlds wealth

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24
Q

What is absolute poverty?

A

when household income is below a certain level that means people are unable to afford necessities

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25
Q

What is the aim of demand - side policies?

A

to shift AD

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26
Q

What are the 2 different types of demand-side policies?

A
  • fiscal policy
  • monetary policy
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27
Q

What is fiscal policy?

A
  • involves the use of government spending and taxation to influence AD
  • government is responsible for setting fiscal policy
  • government presents these in the government budget
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28
Q

What is monetary policy?

A

involves adjusting interest rates and the money supply to influence AD
- Bank of England is responsible for setting monetary policy
- Banks Monetary Policy Committee meets 8 times a year to set policy

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29
Q

What are the 2 main instruments of monetary policy?

A
  • incremental adjustments to the interest rate (usually not more than 0.25%)
  • Quantitative easing
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30
Q

What is quantitative easing?

A

when the central bank creates new money and uses it to buy open-market assets
increasing the supply of money in the economy

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31
Q

What is the official rate?

A

The base rate set by the bank of Englands monetary policy committee

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32
Q

What are market rates?

A

interest rates set by commercial banks

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33
Q

What are asset prices?

A

the price of products that provide an economic benefit in the future

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34
Q

What is exchange rate?

A

the price of one currency in terms of another

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35
Q

What is net external demand?

A

the demand for a countries exports

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36
Q

What is inflation?

A

sustained increase in the general price level

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37
Q

What happens to inflation if the official rate decreases by 0.25%?

A
  • market rates decrease
  • loans are cheaper
  • consumers borrow more
  • consumption increases
  • AD increases
  • inflation increases
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38
Q

What happens to the demand for houses and in turn assets prices if the official rate decrease by 0.25%

A
  • market rates decrease
  • mortgagees are cheaper
  • property buyers borrow more
  • demand for houses increases
  • asset prices increase
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39
Q

What happens when buyers borrow more when the official rate decreases by 0.25%?

A
  • market rates decrease
  • buyers borrow more
  • assets price increases
  • households with assets feel wealthier
  • consumption increases
  • AD increases
  • inflation increases
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40
Q

What is hot money flows?

A

the flow of money from one country to another in order to earn short term profits on interest rates differences

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41
Q

When the official rate increases by 0.25% due to hot money flows what is the impact on inflation?

A
  • hot money flows increases
  • the exchange rate appreciates
  • exports more expensive and imports cheaper
  • net exports reduce
  • AD decreases
  • inflation decreases
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42
Q

When officials rate increases by 0.25%, with market rates what is the effect on inflation?

A
  • market rates increase
  • existing loan repayments now more expensive to repay
  • discretionary income falls
  • consumption decreases
  • AD decreases
  • inflation decreases
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43
Q

What is a Gilt or Bond?

A

long-term form of lending by the government to the private sector who consider it to be a very safe investment

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44
Q

If the Bank of England commits to buy £60bn of gilts a month, what is its effect on inflation?

A
  • commercial banks receive cash for their gilts
  • liquidity in the market increases
  • commercial banks lower lending rates
  • consumers and firms borrow more
  • consumption and investment increase
  • AD increases
  • inflation increases
45
Q

What is fiscal policy?

A

the use of government spending and taxation to influence AD in the economy

46
Q

What are transfer payments?

A

payments made by the governments for which no goods/services are exchanged e.g. subsidies, unemployment benifits

47
Q

What is the effect in inflation if the government increases VAT from 20% to 22%?

A
  • consumers pay more tax
  • discretionary income reduces
  • consumption reduces
  • AD reduces
  • inflation eases
48
Q

What is the effect on inflation if the government decreases corporation tax?

A
  • firms net profits increase
  • investment by firms increase
  • AD increases
  • inflation increases
49
Q

What is the effect on inflation if the government decreases corporation tax?

A
  • firms net profits increase
  • investment by firms increase
  • AD increases
  • inflation increases
50
Q

What is the effect on inflation if the government freezes/reduces public sector pay?

A
  • consumer confidence falls
  • consumption decreases
  • AD decreases
  • inflation decreases
51
Q

What is the effect on inflation if the government increases the allowances in the universal credit (unemployment benefits)?

A
  • household income increases
  • consumption increases
  • AD increases
  • inflation increases
52
Q

How is the government budget presented each year?

A
  • balanced budget
  • budget deficit
  • budget surplus
53
Q

What is the main source of government revenue?

A

taxation

54
Q

What are the different types of taxes?

A
  • direct taxes
  • indirect taxes
55
Q

What are Direct taxes?

A
  • imposed on income and profits
  • paid directly to the government by the individual or firm
    e.g. income tax, corporation tax, capital gains tax, NIC’s, inheritance tax
56
Q

What is capital gains tax?

A

tax imposed on the profit gained by a consumer through an asset

57
Q

What are indirect taxes?4

A
  • taxes imposed on spending
  • supplier is responsible for sending the payment to the government
  • dependent on the PES and PES producers are able to pass on a proportion of the indirect tax to consumer
  • the lower a consumer spends ht less indirect tax they pay
    e.g. VAT (20%), excise duties
58
Q

What does MPC stand for?

A

monetary policy committee

59
Q

How many members are in the MPC

A

9

60
Q

What is the role of the MPC?

A

to meet 8 times a year to set the monetary policy

61
Q

What occurs at the MPC meetings? 3

A
  • setting the bank rate and discuss if quantitive easing is required
  • policy is decided by majority vote
  • can take up to two years for the full effects of decisions to be seen in the economy
62
Q

What are the factors that influence decisions made by the MPC?9

A
  • the state of the economy without further intervention
  • rate of realGDP
  • current level of CPI inflation
  • interest rate elasticity (low confidence = inelastic response)
  • business and consumer confidence
  • state of the property market
  • global outlook
  • unemployment figures
  • exchange rates
63
Q

What is the Great Depression?3

A
  • started in the USA in October 1929 till late 30’s
  • by 1932 the USA unemployment rate was around 25%
  • more than 9,000 banks closed during this decade. The flow of money in the economy was weak
64
Q

What was the effect of the Great Depression?2

A
  • created a global slump
  • in the UK, unemployment doubled and exports halved leading to a major recession
65
Q

What is the 2008 global financial crisis?5

A
  • started in september 08 the collapse of the investment bank of the Lehman brothers
  • the crisis was inextricably linked to interest rates and risky lending in the property market
  • in total, about 10 million households lost their homes
  • unemployment doubled from 5% to 10%
  • 489 banks failed in the 5 year period following crisis - most were bailed out by central governments
66
Q

What was the 2008’s GFC effect on the UK?

A

unemployment rising from 5.2% to 7.8%

67
Q

What were the fiscal policies used in the Great Depression in the USA? 4

A
  • Roosevelts new deal
  • government encouraging construction
  • protectionism to increase consumption
  • increased government spending
68
Q

What was Roosevelts New Deal?

A
  • (1933-1939)
  • provided large government spending on infrastructure
  • and spending on conservation projects
  • he took the Keynesian approach, that increases AD
69
Q

How did the government increase construction projects?

A
  • government employed many people, increasing employment
  • construction projects included
    • the Edgar hoover dam
    • The Golden Gate Bridge
70
Q

Why did the government increase protectionism?

A

to increase domestic production and consumption

71
Q

What fiscal policy was introduced due to ww2?

A

boosted government spending and recovery

72
Q

What were the monetary policy’s used in the Great Depression?

A
  • disagreement over the effectiveness of monetary policy occurred
  • in feb 1930 the Federal reserve bank cut the bank rate from 6% to 4%
  • later that year they raised it to help strengthen the exchange rate as investors were selling dollars to buy gold
  • raising the rate was a contractionary policy that further weakened the flow of money
73
Q

What was the fiscal policy included in the great depression policy responses UK?

A
  • the government prioritised a balanced budget with contractionary policies as they wanted to avoid crowding out
  • in 1931, they cut public sector wages and unemployment benefits by 10% -ehich further reduced consumption and confidence in the economy
  • in 1931 they raised income tax from 22.5% to 25% which decreased disposable income and consumption
  • in 32 they introduced a 10% tariff on all imports to increase production and consumption within the UK
74
Q

What were the monetary policies used in the Great Depression in the UK?

A
  • in 1931, the UK stoped using the gold standard which. had appreciated the currency significantly since 1919
  • the pound depreciated by nearly 25%; exports immediately increased and so did AD
  • the bank rate was lowered from 6% to 2% in late 31, helping to increase AD
75
Q

What was the fiscal policies used in the 2008 Financial Crisis in the USA?

A
  • keynsian approach involving significant govt spending and expansionary fiscal policy from 2008 to 2012
  • banks were not allowed to fail and supported by the government
  • the economic stimulus act of 2008 injected $152bn. in fiscal stimulus
  • the American recovery and reinvestment act of 2009 injected another $787bn. over the next few years
  • both of these increased AD and helped. the economy to quickly recover
76
Q

What were the monetary policies used in 2008 Financial Crisis in the USA?

A
  • federal reserve cut bank rates 8x between October 2007 and the end of 2008 from 5.25% to 0.25%
  • 3 rounds of quantitative easing injected over $3trilion into the money supply
77
Q

What was the fiscal policies used in the 2008 Financial Crisis in the UK?

A
  • keynsian approach involving significant government spending and expansionary fiscal policy from 08 to 2010
  • the banks were not allowed to fail and were supported by the government
  • policies included income tax cuts, VAT reduction of 2.5%, £20bill small business loan guarantee scheme, a car scrapple scheme to support the car industry
  • a major injection by the government was £3bn investment spending on infrastructure and defence
  • the new conservative government switched from expansionary fiscal policy to austerity
  • cutting government spending and raising taxes delayed the recovery
78
Q

What was the monetary policies used in the 2008 Financial Crisis UK

A
  • bank rate was cut 9 times between Demeter 07 and march 09 dropping from 5.75% to 0.5%
  • several rounds of quantitative easing worth £375bn took place between march 09 & july 2012
79
Q

What are the strengths of monetary policy?4

A

the Bank operates independently from the government
- able to consider the long-term outlook
- targets inflation and maintains stable prices
- depreciating the currency can increase exports

80
Q

What are the weaknesses of monetary policy? 5

A
  • conflicting goals
    • economic growth puts upward pressure on inflation
  • time lags between policy and the desired impact (up to 2 years)
  • expansionary policy is less effective in negative output gaps than when used with positive output gaps
    • consumers may not respond to lower interest rates when confidence is low
  • cheaper credit can inflate asset prices in the long term
  • the interest rate has limitations on downward adgjustment
81
Q

What are the strengths of fiscal policy? 6

A
  • spending can be targeted on specific industries
  • short time lag as compared with monetary policy
  • redistributes income through taxation
  • reduces negative externalities through taxation
  • increased consumption of merit/public goods
  • short term government spending can lead to an increase in the long-run aggregate supply
82
Q

What are the weaknesses of fiscal policy? 3

A
  • policies can fluctuate significantly as governing parties change
    • long term infrastructure projects may lack follow through
  • increased government spending can create budget deficits
    • repaying this debt may lead to austerity on future generations
  • conflicts between objectives
    • cutting taxes to increase economic growth may cause inflation
83
Q

What is the aim of supply side policies?

A

to shift the LRAS

84
Q

What are the 2 types of supply side policies?

A
  • interventionist
  • market-based
85
Q

What are interventionist supply-side policies?

A

policies that require government intervention in order to increase the full employment level of output
- these are mainly used to correct market failure

86
Q

What are Market-based supply-side policies?

A
  • removing obstructions in the free market that are holding back improvements to the long-run potential
    • e.g. setting up a regulator to prevent monopolies forming
87
Q

What is the overall aim of the supply side policy?

A

to increase LRAS means to increase the quantity/quality of the factors of production

88
Q

What are the 5 aims of supply side policies?

A
  • to increase incentives
  • to promote competition
  • to reform the labour market
  • to improve the skills and quality of the labour force
  • to improve infrastructure
89
Q

What is the market based approach to meet the supply side aim of increasing incentives?

A
  • reducing income/corporation tax rates
  • restructuring the unemployment benefits system to incentivise the employed to seek work
90
Q

What is the market based approach to meet the supply side aim of promoting competition?2

A
  • privatisation and deregulation
  • trade liberalisation
91
Q

what is trade liberalisation?

A

removing the barriers to trade such as tariffs

92
Q

What is the market based approach to meet the supply side aim of reforming the labour market?

A
  • decreasing trade union power so wages can be decreased
  • decreasing minimum wages to lower costs of production
93
Q

What is the interventionist based approach to meet the supply side aim of promoting competition?

A
  • increased government spending on innovation
  • direct support to firms promotes international competitiveness
94
Q

What is the interventionist based approach to meet the supply side aim of reforming the labour markets

A
  • increased government spending on improving occupational mobility
95
Q

What is the interventionist based approach to meet the supply side aim of improving the skills and quality of the labour force?

A
  • increasing government spending on education and retraining
  • increasing government spending on healthcare so that productivity improves
96
Q

What is the interventionist based approach to meet the supply side aim of improving infrastructure?

A
  • increased government spending on infrastructure
97
Q

What are the strengths of supply side policies? 5

A
  • to increase the rate of growth of an economy
  • reduce average price levels
  • reduce unemployment
  • increase the value of net exports
  • improvements in infrastructure can raise the quality of life for all citizens
98
Q

What are the weaknesses of supply-side policy? 5

A
  • distribution of income worsenes as labour market reforms and wage policies lower workers wages
  • expensive to implement
  • significant time lags between expenditure and seeing the benefits
  • due to the long term nature, changes in government often result in changes to budgets and scope of projects
    • the end result may be less effective than it could have been
  • vested interests can result in less effective outcomes e.g. many ecamplesof privatisation occurring in such a way that the governments preferred bidders obtained an asset at a knock down price
    • often the preferred bidders were not necessarily the most efficient firms
99
Q

What are the common trade-offs that exist between macroeconomic objectives?6

A
  • economic growth & inflation
  • economic growth and environmental sustainability
  • economic growth and inequality
  • economic growth and balanced budget
  • economic growth and balancing the current account
  • low unemployment and low inflation
100
Q

What are Trade-offs?

A

achieving one macroeconomic objective at the cost of worsening progress in another objective

101
Q

What is the economic growth and inflation trade off trade-off?

A
  • increasing economic growth causes the economy to move closer to full employment
  • prices for remaining resources are bid up leading to inflation which may outpace the target inflation rate of 2%
102
Q

What is the economic growth and environmental sustainability trade off?

A
  • economic growth often increases pollution, negative externalities and the depletion of non renewable resources
  • the higher the growth, the faster the depletion
103
Q

what is the economic growth and inequality trade-off?

A
  • during periods of high economic growth, the profits the owners of the factors of production receive are disproportionate to any increase in workers wages leading to greater inequality
104
Q

what is economic growth and balanced budget trade-off?

A

economic growth driven by expansionary fiscal policy often requires a budget deficit

105
Q

what is the economic growth and the balancing current account trade off?

A
  • economic growth usually leads to high income
  • leads to an increase in imports by households
  • thereby worsening the current account balance
106
Q

what is the low unemployment and low inflation trade-off?

A
  • the closer an economy moves to full employment the less workers will be available for hire
  • wage inflation will help increase overall inflation
107
Q

What does SRPC stand for?

A

short-run Philips curve

108
Q

What is the short run Philips curve?

A
  • it observes that there must be a trade of between unemployment and inflation
  • rising inflation is accompanied by falling unemployment
  • rising unemployment is accompanied by falling inflation
  • this trade-off makes it difficult for the government to achieve both low unemployment and low inflation
109
Q
A

Economics (10 decks)

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