2:5:1 Macroeconomic Objectives And Policies Flashcards
(87 cards)
1
Q
Define Interest Rates.
A
Is the cost of borrowing and the reward for saving
2
Q
What are the benefits of Quantitative Easing?
A
- Creates Fiscal Expansion, not austerity (during a recession it promotes growth rather than trying to reduce the nationals debt)
- Inflation has not been a macroeconomic problem since 2008
3
Q
What happens to house prices as Interest rates Rise?
A
House prices fall because mortgages become less affordable which causes a negative wealth effect.
4
Q
Quantitative Easing is a form of….
A
Expansionary Monetary Policy
5
Q
How will a rise in interest rates affect those looking to Hire Purchase?
A
The monthly repayment instalments will becomes more expensive, which means that consumer may delay future major expenditure
6
Q
What is a Bank Balance?
A
the amount of money held in a bank account
7
Q
What is Balance Sheet?
A
Is a snapshot of a Businesses Assets and Liabilities on a particular day.
8
Q
Who carriers out Fiscal Policy?
A
The government
9
Q
What is meant by creating money Electronically?
A
involves making its bank balance bigger (the amount of money in its bank account)
10
Q
If Monetary Policy is Expansionary (cut in interest rates or increased amounts of QE) then what what happens to AD?
A
AD shifts to the Right
11
Q
What is the inflation target?
A
2% (1% either side)
12
Q
What is meant by the term Spare Capacity?
A
measures the extent to which an industry, or economy is operating below the maximum sustainable level of production
13
Q
What is meant by the term fiscal policy?
A
involves the use of government spending, taxation to affect the level and growth of aggregate demand in the economy
14
Q
How can Fiscal Policy boost Aggregate Demand?
A
- Cutting Tax
- Boosting Government Spending
15
Q
Does the government decide the level of interest?
A
No
16
Q
Evaluative points for the Monetary Policy.
A
- In a Liquidity trap, Lower Interest Rates May not increase spending because people are trying to pay back debts
- Cutting Interest Rates very low could distort future economic activity (can cause bubbles which destabilise economy growth)
17
Q
What are the two demand-side policies?
A
– Monetary policy
– fiscal policy
18
Q
How can Monetary Policy boost Aggregate Demand?
A
By cutting Interest Rates
19
Q
What is meant by tight fiscal policy?
A
- Decreasing AD
- Government will cut Government Spending (G) and/or increase taxes
- Higher taxes reduces consumer spending
20
Q
Evaluative points for expansionary fiscal policy.
A
worsen the government budget deficit, and the government will need to increase borrowing.
21
Q
What is the aim of Demand Side Policies?
A
Increase Aggregate Demand
22
Q
Do Consumers save more when interest rates are high?
A
Yes
23
Q
What is meant by a Negative Wealth Affect?
A
Where lower asset prices mean that people feel less inclined to spend.
24
Q
How will a rise in interest rates affect those with a Variable Mortgage?
A
- People’s mortgage payments rose and they will be discouraged from spending
- People in Fixed mortgages will not experience this immediately
25
Evaluative points for Monetary Policy.
- Raises the cost of production and causes inflation
- Takes 18 months to 2 years for interest rates to have their full impact (further delays because many mortgage holders have fixed rate policies, which delays the impact of their spending for some years)
- Monetary Policy hits the whole economy big and small businesses.
- Rising Interest Rates usually worsens income distribution
26
Evaluative points for fiscal policy.
– It depends on the size of the Multiplier
| - Depends on the state of the economy (works best in deep recession, Liquidity trap,
27
Which is more effective Monetary or Fiscal Policy?
- Monetary Policy is set by the Bank of England and therefore reduced political influence
- Monetary Policy is quicker to implement.
- Monetary Policy is inefficient during a Liquidity trap
28
When is Quantitative Easing used?
In a Liquidity trap
29
What is meant by the term monetary transmissions mechanisms?
Changing the rate of interest set off a chain reaction is in the economy which means that aggregate demand will shift
30
What happens to the Cost of Borrowing when interest rates are raised?
Cost of Borrowing Rises
31
In Monetary Policy, how do Lower Interest Rates boost Aggregate Demand?
- Reduce the cost of borrowing
- Encouraging investment and consumer spending
- Reduces the incentive to save, making spending look more attractive instead
- Lower mortgage interest payments increasing disposable incomes for consumers
32
What is meant by the term budget (or fiscal) deficit?
If government spending is greater than taxation
33
Drawbacks of Using Quantitative Easing.
- Greater inflow of money to the banks has caused them to take greater risks
- Causes Inflation
34
What are Government bonds?
where you loan money to a government in return for an agreed rate of interest.
35
What is meant by the term Indirect Tax?
Tax on spending (eg. VAT)
36
What will Firms do as a result of rising interest rates?
Invest less as they will find that investment looks less attractive, fewer investments will make a higher return than the increased cost of borrowing.
37
What is meant by expansionary fiscal policy?
– Cutting tax
– raising government spending
Or both
38
What will happen if Demand Side Policies are used in an economy which is already close to full capacity?
It will mainly cause inflation
39
What is meant by the term monetary policy?
Using monetary instruments such as the interest rate and quantitive easing to influence the levels of spending and Aggregate Demand
40
How will Exports be affected by a rise in interest rates?
- Level of Exports might fall
- Because cost of making them increases because interest rates are essentially a cost of production
- Imports will then rise
41
What is the effect of higher interest rates on Savings?
1 - Increased Return on Savings
2 - Reduced Consumption & Fall In house prices
3 - Lower Economic Growth & Lower Inflation
42
What is the net effect of a Budget (or fiscal) deficit?
Pumps spending power into the economy
| Multiplier magnifies the effect of this boost
43
What factor causes Quantitative Easing to not achieve its full potential?
- Nature of Banks
• Boosting the value of a banks assets and their holding of liquid assets as a result of QE would expect banks to lend more
•But after the global financial crisis banks are concerned about their health and as a result are less willing to lend
44
What is the monetary policy committee (MPC) objective?
Control inflation
45
What is meant by the term fiscal policy?
Is the manipulation of taxes and government spending to influence the overall level of demand in economy
46
Because firms investments decreases when interest rates rise, what effect will this have on Aggregate Demand?
- Reduces AD
| - Causes Problems for long term output prospects
47
How does lower tax in the Fiscal Policy boost Aggregate Demand?
- Lower Tax (income tax) will increase disposable income and encourage consumer spending
48
What is meant by the term demand-side policies?
Is the deliberate manipulation by the government of aggregate demand in order to achieve macro economic objectives.
49
What are the effects of higher rates of interest on borrowing?
1 - Increased cost of borrowing
2 - Reduced Investment
3 - Lower Economic Growth
50
Why was quantitive easing needed during the financial crisis?
– Contracting real output
| – price deflation
51
Define Quantitative Easing.
Is the Central Bank increasing the money supply and using these electronically created funds to buy government bonds.
52
What is the net effect of expansionary fiscal policy?
Aggregate demand rises because consumer have more disposable income so spend more
53
How is net exports affected by interest rate changes?
Interest rates affect the cost of production and therefore productivity
Also interest rate changes affect the exchange rate which impacts export and import prices
54
When was quantitive easing introduced to the economy?
March 2009
55
Define Liquidity Trap.
occurs when low/zero interest rates fail to stimulate consumer spending and monetary policy becomes ineffective.
56
Do consumers/firms borrow more if interest rates are low?
Yes
57
What are the effects of higher interest rates on mortgages?
1 - Higher mortgage interest payments
2 - Reduces Consumption & Fall In house prices
3 - Lower Economic Growth & Lower Inflation
58
When can Demand Side Policies be used?
- During a recession
| - A period below trend growth
59
How does Quantitative Easing Work?
- Central Bank creates new money electronically (by adding it to its balance sheet)
- This Money is used to buy financial assets (government bonds)
- More Demand leads to higher prices of assets (Rise in the price of bonds leads to a lower yield for GOVERNMENT bonds)
- Can cause a fall in long term interest rates
- Lower Interest rates and more cash in the banking system stimulates AD through a rise in consumption and investment
60
What happens to the balance of payments as interest rates rise?
- Worsens
- Because Cost of production for firms increase so then they might reflect this cost increase onto the consumers in the form of prices, making UK exports less competitive globally
- Appreciation of the pound causes the level of imports to increase (SPICED) (Strong Pound Imports Cheap Exports Dear)
61
What are the governments seven main macroeconomic objectives?
```
– Economic growth
– reduction in unemployment
– control inflation
– balance of payments
– sustainability
– debt
– inequality
```
62
What is the Current Base Rate? (Lowest Rate of Interest)
0.75%
63
Evaluative points for Fiscal Policy.
- Fiscal Policy can only be implemented In the annual budget, creating a time lag in decision making for fiscal policy, Autumn time.
- Tax Changes cannot begin until the start of the new fiscal year in April, sometimes 1 or 2 years ahead.
- Government May Have poor information about the state of the economy
- Crowding Out effects, because government has to borrow from the private sector who will have lower funds for investment
64
What is the effect of lower interest rates on money flows into the UK?
1 - Increased amount of ‘Hot Money Flows’
2 - Appreciation in the exchange Rate
3 - Lower Inflation
65
What will happen to the budget deficit (national debt) if the government adopts a tight fiscal policy?
Cause an improvement in the government budget deficit
66
By conducting Quantitative Easing does the government print new money?
NO it produced it electronically
67
What is meant by the term Direct Tax?
Is a tax on incomes (eg. Income tax, corporation tax)
68
How can the government change fiscal policy?
By changing its tax or government spending
69
Increasing interest rates is good for....
| But bad for.....
- Good for controlling inflation
| - Bad for economic growth
70
How does an Indirect Tax affect Aggregate Supply?
Because it affects the amount that firms are willing to sell at any particular price
71
What is the net effect of a budget (or fiscal) surplus?
Less spending power within the economy with negative Multiplier effects
72
What must there be in an economy in order for Demand Side Policies to work effectively?
Spare Capacity (or a negative output gap)
73
How are contractionary Fiscal policy and budget surplus linked?
Both are used in a boom and contractionary Fiscal Policy leads to a budget surplus
74
What two things can the monetary policy committee change in order to influence interest rates?
Interest rates
| Quantitive easing
75
What is meant by the term budget (or fiscal) surplus?
Is when government spending is less than taxation
76
If Fiscal Policy is Expansionary (cut in taxes or a rise in government spending) then what happens to AD?
AD Shifts to the Right
77
What happens to the exchange rates when interest rates rise?
The £ appreciates because there is greater ‘hot money flows’ due to the higher interest rates.
78
What is meant by a Bond Yield?
annual profit that an investor receives for an investment.
79
What is meant by the term Stagflation?
Is an economy that is stagnant (not growing) but is also suffering from inflation
80
Which has a greater time lag Monetary or Fiscal Policy?
Monetary Policy
81
What is the aim of Quantitative Easing?
- Increase Economic Activity (encourage bank lending)
- Higher Inflation Rate (avoid deflation)
- Lower interest rates on assets
82
What are the problems with using Quantitative Easing to boost Aggregate Demand?
- By Increasing the money supply will cause inflation
However, during 2009-12 when QE was used Inflation caused by QE was minimal
- Though QE alone failed to return the economy back to normal growth projection
83
How long does it take for Monetary Policy Interest Rates to change?
18 months to 2 years to have a full impact
84
What is the affect of high interest rates on Consumers?
- Consumers who borrow in order to finance their spending will be deterred from doing so
- Savers will not spend their money as there is a greater opportunity cost in doing so.
85
Who decides what the rate of interest will be?
The monetary policy committee (MPC)
86
What are the advantages of using Quantitative Easing to boost Aggregate Demand?
- Can be used in a Liquidity Trap (Monetary Policy sometimes doesn’t)
- By Increasing the money supply (electrical money supply, Government does not print more money) and low interest rates will boost investment and economic activity
87
How will tax affect Aggregate Demand?
Taxes makes people feel better or worse off according to how much their disposable income changes
