2.6 macroeconomic objectives and policies Flashcards
(24 cards)
main macroeconomic objectives
Price stability (2% target)
low unemployment
BOP equilibrium
income equality
environmnetal protection
standards of living
Phillips curve
model showing the possible inverse non-linear relationship between unemployment rate and rate of inflation
(Y-inflation rate 5, X-unemployment rate %)
Conflicts/trade offs examples
faster growth= demand pull inflation, widening deficit in current account, income inequality worsen if growth is not inclusive
low unemployment increases real wages= cause cost push inflation
reducing gov borrowing and national debt = slow groth, living standards to stagnate
Stagflation
both unemployment and inflation are high
Who thought it was possible for differing levels of unemployment at same inflation rate
keynes
Monetary policy
use of interest rates and money supply to affect AD (run by independent BofE)
Direct tax
tax on income/wealth
(corporation tax, income tax, capital gains tax)
indirect tax
tax on spending
(VAT)
Progressive/ proportional tax
Progressive= takes higher proportion of income from higher incomes
Proportional= same proportion of income, whatever levels
Regressive tax
takes lower proportion of income from high income
chains of analysis for using demand side fiscal policy to influence economy
1) gov cuts income tax
2) stimulating rise in consumer spending (ceteris paribus)
3) AD shifted right, increasing real GDP
4) short run economic growth helps close negative output gap
5)drawing unemployed resources
6) fiscal mulitplier effect could further stimulate AD growth and real GDP increase further
Capital spending
Gov investment in economies infrastructure
demand-side monetary policy
- using interest rates, changes in money supply and /or changes in exchange rate to affect AD (run by BofE)
Bank base rate
main interest set by BofE, the rate at which commercial banks can borrow from BofE
Quantitative easing
BofE asset purchase scheme to increase the money supply (quantitative tightening when it is reverse)
- large scale purchases of financial assets, such as gov bonds, to inject liquidity into financial system
- the BofE purchase these by creating money
- Lower interest rates encourage borrowing and investment
Nominal vs Real rate of interest
Nominal= actual rate paid
Real rate= nominal rate adjusted for inflation
Chains of analysis for how interest rates changes feed into AD and influence inflation
1) high interest rates raise cost of borrowing, slowing consumer spending and business investment
2) Reducing AD for goods and services, in turn easing upward pressure on retail prices
3) Higher interest rates lead to an appreciation of currency, making imports cheaper, helping to reduce inflation
4) higher interest rates increase return on savings
5) encouraging savings and helping to reduce inflationary pressures from excess AD
How can demand-side monetary policy be used when Deflation is a threat?
BofE cuts interest rates to boost AD, increasing price levels, increasing employment of resources
monetary authority and major regulatory bank
UKs BofE, the Monetary Policy Committee consists of nine members who set base rate and decide if QE or QT is needed
factors considered by the BoE MPC when making bank base rate decisions
- Rate of growth of real GDP and estimated size of output gap
- forecasts for price inflation
- rate of growth of wages and other business costs
- Movements in a country’s exchange rate
- Rate of growth of asset prices such as houses
- Movements in consumer and business confidence
- External factors such as global energy prices and inflation in other countries
- Financial market conditions including rate of growth of credit/money
QE is a form of what monetary policy
Expansionary, stimulating AD
Expansionary monetary policy
Cut interest rates, increase money supply via QE to stimulate AD growth to prevent deflation.
- A depreciation on currency can boost AD also
Contractionary monetary policy
Raise interest rates, decrease money supply via QT to slow AD growth and control inflation
Aims of Supply Side Policies
- Incentives to work and invest in human capital
- increase labour and capital productivity
- increase capital investment and research and development spending
- improve living standards and better regional economic balance
