2.6 Macroeconomic Objectives and Policies Flashcards
(238 cards)
1
Q
What are the 4 main macroeconomic objectives
A
Economic growth
Low unemployment
Low and stable inflation
Balance of Payments on current account
2
Q
What is the acronym for the 4 main macroeconomic objectives
A
GLULIBOP
3
Q
What is GLULIBOP
A
Growth
Low unemployment
Low inflation
BOP equilibrium
4
Q
What is the UK trend of economic growth
A
2.5%
5
Q
What might EMEs and developing economics governments try to increase economic development over growth
A
They intend to improve:
SoL
Life Expectancy
Literacy Rates
6
Q
What is the acceptable level of unemployment due to frictional unemployment
A
3%
7
Q
What type of work should the labour force be employed in
A
Productive work
8
Q
What is the UK target for inflation
A
2%
9
Q
How is inflation measured in the UK
A
CPI - consumer price index
10
Q
What happens in the UK if the inflation rate falls 1% outside the target section
A
The chancellor of the exchequer is sent a letter by the governor of the BofEto explain why it’s happened and what the bank is going to do about it
11
Q
Why is the BOP on the current account important
A
It allows the country to sustainably finance the current account for long term growth
12
Q
What are the other 3 macroeconomic objectives (not main ones)
A
Balance government budget
Protection of environment
Greater income equality
13
Q
what is the point of balancing govenrmetn budget
A
Ensures there’s control over state borrowing so no national debt escalation (so the gov can borrow cheaply in the future)
14
Q
Why is environmental protection an important macroeconomic objective
A
Provides LR environmental stability so future generations can access natural resources (no excessive pollution)
15
Q
Why is greater income equality an important macroeconomic objective
A
Minimises gap between rich and poor
Associated with a fairer society
16
Q
What do government do to achieve their macroeconomic objectives
A
Monetary and fiscal policy
17
Q
What do the government try to do during a recession
A
Increase AD to increase employment and economic growth
18
Q
What do government do during a boom
A
Reduce AD to reduce inflationary pressure
19
Q
What do governmetn do with supply side policy
A
Aim to bring about long term growth
20
Q
What is expansionary policy
A
Aimed at increasing AD to bring about growth
21
Q
What is deflationary policy
A
Aims to decrease AD to control inflation
22
Q
What is monetary policy
A
Central bank controls AD by:
Altering base interest rates
Altering money supply
23
Q
What is fiscal policy
A
Government spending
Taxation
Used to manipulate level of AD and improve macroeconomic performance
24
Q
What is the interest rate
A
The price of money
25
What is a repo rate
The rate the BofE will charge other banks or financial institutions for short-term loans.
26
Why do banks typically have a higher rate of interest than the repo rate
They have to be able to make returns if they have to borrow from the BofE
27
What does increase in IR cause
Increased borrowing cost for consumers and businesses
Leads to fall in C and I, reducing AD
28
What specific goods decrease more during a period of reduced AD
Consumer durables and houses
29
What does high interest rates do to ROI
You need higher ROI so instead people save more (more interest earned)
30
What happens if less borrowing and more saving happens
Fall in demand for stocks, shares and bonds
Fall in prices of these
Negative wealth effect
Fall in C and I
31
What do higher IR encourage foreigners to do?
Hold more money in British banks so they see a higher rate of return
This causes the value of the pound to rise
SPICED
Less trade
AD falls
32
What is the issue with IR (time scale)
May take up to 2 years to have the full effect
Small changes may not achieve anything
33
What may a lack of confidence mean for IR policy
No matter how low IR are, consumers and businesses do not want to lend to them
34
What do high IR over a long time period cause
Discouraged investment and decrease LRAS
35
What is QE
BofE buys back assets (bonds) in exchange for money from commercial banks so they have more liquidity so lend more
36
What can QE prevent
A liquidity trap - where low IR cannot stimulate AD
37
What can the BofE do to buy assets
Increase size of the bank’s accounts (reserves) so they lend more
38
What did the BofE do post GFC
Banks wanted to keep their money in reserves so even buying assets back did nothing
They bought bonds from the private sector institutions like insurance companies, pension funds etc.
39
What effect does QE have
Increasing C and I
Increases AD
Ensures a country meets its inflation target
40
What happens when the bank buys up assets for QE
Rise in D do asset prices rise
41
What happens when asset prices rise due to QE
+ve wealth effect due to rising value of house, shares etc.
42
What happens to cost of borrowing post QE
Decreases as higher asset prices mean IR are lower
43
How do IR (yields) move relative to asset prices value
They move oppositely due to when the value of assets increase, the yield becomes a lower value as IR decrease
44
What happens to money supply during QE
It increases as private sector companies receive more money to spend on G&S and other financial assets (increasing C, I components of AD)
45
What does the increased liquidity post QE create opportunity for
Increased lending to finance C and I on credit
46
What can commercial banks do post QE
Lower IR as they are receiving loads of money from the BofE
47
What are problems with QE (inflation)
If overused, can result in hyperinflation
48
What do people say a consequence of QE is (second hand goods)
It only increases demand for 2nd hand goods which pushes up prices but doesn’t increase AD
49
Example of QE causing no new goods to be made (only pushing up prices of existing goods)
Second hand houses become more expensive through increased demand and no new houses built
50
What is there no guarantee with QE
Higher asset prices lead to higher consumption (if confidence still remains low)
51
What effect did QE have on the housing market
Stimulated demand and led to rapid price rises in 2013, worsening the issue of geographical immobility
52
What time scale is QE supposed to be used on
Short term, not permanent
53
What concerns are there about. QE in the Eurozone
Banks and economies are too dependent on it
54
What is an open market operation
Central bank sells more government securities on the open market which causes a fall in bank balances
This means banks must reduce their lending so monetary supply will fall
55
What is a security
A promise by the government to pay a certain amount of money to the owner at a certain time, bought for less than the actual value
56
What do government do to increase monetary supply (opposite of an open market operation)
They will buy back government securities
57
What is a government bond
A type of government security
58
Difference between and OMO and QE
59
What is an OMO
open market operation
60
Who controls monetary policy
The BofE
NOT government
61
What is the MPC in terms of money
Monetary policy committee
62
What does the MPC do?
Makes the most important decisions:
BofE base rate
Actions on QE
63
What is the MPC’s main aim
To keep inflation at 2%
64
What happen if inflation goes below 1% or above 3%
They governor of the BofE has to write a letter to the chancellor of the exchequer saying what happened and what the plan is
65
How do the BofE calculate inflation
CPI (consumer price index)
66
what has MPC policy been focussed on since 2009
Economic growth and employment
67
When do the MPC plan to raise the IR
Once -ve output gap has been eliminated and strong economic growth
68
Who makes up the MPC
5 from the BofE including the governor
4 independent outside experts (economists)
69
What are the two levers of fiscal policy
Income/corporation tax
Government spending
70
How does a rise in income tax affect AD
Reducing in C so decreases AD
71
How does a rise in corporation tax affect AD
Decrease profits post tax so less investment so lower AD
72
How does a rise in government spending affect AD
G increases as a component of AD
73
Where are fiscal plans outlined
In the budget
74
What do the governments fiscal plans include
Spending, borrowing and taxation
75
What is a government budget deficit
Government spends more than they receive
76
What is a government budget surplus
Government receives more than they spend
77
What is a direct tax
Paid directly to government by the individual taxpayer
78
What is an indirect tax
Person charged with paying money to government passes on the cost to someone else (supplier includes VAT in prices)
79
What are the 4 highest revenue raising taxes
Income tax
National insurance
VAT
Corporation tax
80
What are some non-main taxes
Council tax
capital gains tax
inheritance tax
81
What is income tax (explanation)
Direct tax
25% of all tax revenue (largest)
% of income at different levels
82
What is VAT
Indirect tax
Standard rate is 20%
Most food and children’s clothes aren’t charged
Fuel and power is only 5%
83
What is a problem with reducing government spending
Impacts LRAS
Reduced education quality
Less R&D on new tech
84
How do taxes affect incentives
High taxes reduce income as there is no incentive to work
(Laffer Curve)
85
Why may government be worried about rising taxes
Political issues
(They don’t want to be voted out)
86
When is fiscal policy difficult to undertake
During a period of austerity
87
What is austerity
Government policy that aims to decrease government deficit through decreasing spending and/or increasing taxation
88
What does the impact of fiscal policy depend on
The Multiplier
Bigger multiplier, bigger impact on AD
89
What do classicists argue the multiplier is for fiscal policy (vs Keynesian economists)
Classicists: almost 0
Keynesians: large if targeted correctly
90
What effect do classicists believe demand management will have
No effects on LR output so supply side policy should be used
91
What do classicists think increasing AD during a depression will cause
No effect except increase price levels (inflation)
92
What do Keynesians think will happen if the economy is in short-run disequilibrium
It can be in SR disequilibrium for a long time
(Not full employment)
93
On a Keynesian LRAS, what do the impact of changes in AD depend on
Where the economy is operating (at full employment vs some unemployment)
94
According to a Keynesian, how are the impacts of changes in AD affected by full employment
Only causes higher prices (inflation)
95
According to a Keynesian, how are the impacts of changes in AD affected by higher unemployment
A rise in AD will only lead to higher output (no inflation)
96
What do both demand side policies (monetary and fiscal) see between introduction and full effect
A time lag
97
What is the biggest issue of demand side policy
That expansionary policy is inflationary
Deflationary policy causes unemployment
98
What does the biggest issue of demand side policy depend upon
Elasticity of the curve
Which curve you use (Classical vs Keynesian)
99
What cannot be done through demand management alone
The government cannot:
create low and stable inflation
High economic growth/low unemployment
100
Why is monetary policy useful?
Government can increase AD without increasing government spending which means no fiscal debt
101
What do classicists argue should be used to manage demand
Only monetary policy
102
What does fiscal policy have a large impact on
Supply side of the economy
103
Example of how fiscal policy has significant impact on supply side of the economy
Increased spending on education to increase AD also increases LRAS
104
Why is fiscal policy more effective at targeting specific groups and reducing poverty
E.g. Increasing benefits increases AD and reduces inequality
105
What should be used to reach government goals
Demand side and supply side policies
106
When did the whole world experience a severe depression
1930s
The Great Depression
107
What was UK unemployment during the Great Depression
15%
108
What was US unemployment during the Great Depression
25%
109
What areas in the UK were worst affected by the Great Depression
Primary and manufacturing industry
Because they relied on exports
110
What set off teh Great Depression
Wall Street crash of 1929
111
What happened in the Wall Street Crash
Sharp fall in share prices on the New York Stock Exchange
112
What do some say cased the Wall Street Crash (confidence)
Loss of consumer and business confidence
Less I
Less C
Spiral
113
How could the Wall Street Crash have been caused? (US banking)
Too much lending caused an unsustainable boom and system couldn’t deal with the crease
Government allowed banks to fail causing decreased confidence, decreasing confidence and the spiral
114
What caused the Wall Street Crash according to some people? (Protectionism)
Less worldwide trade
Lower AD
Lower Confidence
115
What is the second reason protectionism could have caused the Wall Street Crash
Export related firms couldn’t repay loans so caused banks to fail
116
What did the US introduce in 1930
Smoot-Hawley Tariff Act
117
What did the Smoot-Hawley Tariff Act do?
Decreased total US imports
Countries who exported to the US had reduced AD
Other countries retaliated with other tariffs
118
How did the UK cause their own depression also
They left the Gold Standard in 1914 and rejoined it in 1925 but at 1914 levels so rapid appreciation occurred
This led to SPICED issues…
119
What did the Uk government believe balancing the gov budget was the key to?
Recovery, borrowing money would prevent hte private sector would stop the private sector spending
120
What was the emergency UK budget post depression?
Cut public sector wages
Cut benefits 10%
Raised income tax from 22.5% to 25%
This reduced AD when it needed increasing
121
What happened to teh pound post depression
Speculators attacked it so the gold standard was threatened (nearly forced out)
122
What did high IR do (+ve and -ve)
No borrowing from abroad
Decreased AD
123
When did the UK have to leave the Gold Standard?
21 September 1931
124
Why did the UK have to leave the gold standard in 1931
Ongoing speculation
125
What happened post 1931 UK leaving gold standard
25% depreciation of the pound
IR were cut by 2.5%
Increased AD (X-M increased)
126
Where was there recovery post leaving the gold standard in 1932 (UK)
London and SE
127
Where did not recover post 1931 Uk leaving the gold standard
North
Scotland
(Didn’t reach full employment until 1941)
128
What did the US do post Great Depression
Originally same view as the UK of balancing hte budget
Roosevelt promised:
public sector investment
work schemes for unemployed
Financial stimulus
129
When did the USA reach full employment
1943 (same as UK)
130
What is Roosevelt’s New Deal an example of
Keynesian expansionary fiscal policy
131
What did Roosevelt’s New Deal not do
Not large enough to be successful but did have a large impact
(Since the unemployment was so high)
132
What are parallels between the GFC and the Great Depression
Both started in the US
Spread throughout the world
Large and long term impacts
GFC was NOT as severe
133
What caused the 2008 GFC
Mortgage lending
134
How was the mortgage lending a moral hazard
Bank workers saw higher bonuses for selling more mortgages so gave people loans they couldn’t afford
135
What was teh problem with the mortgages in the GFC
Low IR for hte first few years but then they hiked
People couldn’t afford the higher IR so defaulted
136
What happened in the GFC when people couldn’t afford their mortgages
Houses were repossessed
Demand fell
Prices of houses fell below mortgaged value
137
What is negative equity
Where the value of a house goes below the mortgage
138
What is a prime vs sub-prime mortgage
People who could pay it back vs those who couldn’t
139
What did banks do with sub-prime mortgages
Sell them like they were prime to other banks
140
What was the aim in selling sub-prime mortgages
To reduce risk so no bank was highly dependent on risky mortgages
Instead increased risk as many banks held assets worth less than they had paid for them (spread the effects)
141
What happened in the GFC when people couldn’t afford their mortgages
Houses were repossessed
Demand fell
Prices of houses fell below mortgaged value
142
What happened when the sub-prime mortgage market was revealed
Massive fall in confidence
Banks stopped lending to each other as they would lose money if other banks collapsed
143
What was the first bank in the UK affected by the GFC
Northern Rock Bank
144
What happened to Northern Rock Bank in 2008
Savers began to withdraw their money
145
What investment bank was allowed to fail in 2008
Lehman Brothers
Caused panic as people though every bank would fail and they would lose money
146
What did UK and US governments have to do post GFC
Nationalise banks and building societies
Guarantee savers their money to prevent the chaos of a bank collapsing
147
What banks did the UK government buy post GFC
Lloyds
RBS
Northern Rock
148
What policy did the UK employ post GFC
Expansionary monetary policy with record low IR and QE
149
Waht did the BofE say the QE was for
It lead to lower unemployment and higher growth than what would have occurred otherwise
150
What did the US government use policy-wise
More expansionary fiscal policy
Led to a faster recovery
151
Waht did the Uk prioritise in 2010 post GFC
Reducing national debt over fiscal stimulus which the USA didn’t do until 2013
152
what is a supply side policy
aimed at increasing teh productive potential of the economy and shifting the S curve to the right
153
over time, what happens to the supply-side of the economy
improvements independent of the government
through actions of the private sector such as investment
154
what can government do to speed up supply-side improvements
use supply-side policies
155
where can supply-side policies be
across the whole economy or to target specific sectors
156
what is a market based policy
policy designed to remove things that prevent the free market system working efficiently which cause lower output and higher prices
157
what do market based barriers include
reduce willingness of workers to take jobs
inefficient production
lack of risk-taking
158
what is an interventionist policy
designed to correct market failures
e.g. no education in the free market so government provides it
159
why do interventionist policies exist (supply-side)
fimrs may not look long term, they instead focus in on short run profits for shareholders instead of investment (gov encourage I)
160
what do free market economists argue for market-based policies
they want government to have as little involvement as possible
161
what can be said about those who support interventionist policies
they believe that the free market is not optimal so gov must intervene to improve it
161
how can incentives work (supply-side)
increasing incentives to work or employ people
this increases workforce size
leads to more G&S produced
162
what does a reduction in benefits taxes do? (supply-side)
increases opportunity cost of being out of work
being in work is always better than not being in work
163
what does a reduction in benefits solve (supply-side)
prevents the poverty trap
164
what is the poverty trap
low income workers are no better/worse off if they have a job vs being on benefits
165
how does the UK government try to mitigate against the poverty trap
subsidising workers with tax credits
166
what is a NIC
national insurance contribution
166
what can also increase incentive for employers to employ more people
reducing/removing minimum wage
166
how can reducing taxes on firms improve (supply-side)
reducing taxes like NICs encourages employment
167
what risk taking incentive could be used to increase (supply-side)
lowering tax so more ROI
168
what is the problem with incentivising risk taking (supply-side)
lower tax will have little impact on incentive to work
reducing tax instead only increases income inequality causing government to have less revenue so have to decrease spending or increase borrowing
169
what (supply-side) can be used to promote competition
privatisation
competition policy
170
how is privatisation used to promote competition
selling nationalised companies to private sectors or deregulation
this reduces restriction on the market so firms are more competitive
171
how is competition policy used to promote competition
prevents monopolies
makes cartels and price fixing illegal
172
what is the UKs body to make sure markets are competitive
CMA which enforces the Competition Act and the Enterprise Act
172
what is the belief surrounding competition being necessary
needed for efficiency as they must produce a higher quality or cheaper service
173
what do free market economists argue about governments intervening
no need to innovate or cut costs
nationalised industries are government failure
173
how can reforming the labour market shift the supply curve
increasing the retirement age so more people are working
174
example of weakening trade unions in the UK
unions now need 14 days notice to strike with higher turnout and support
174
how can the labour market be made more flexible to make it more effecient
weakening of unions (since they push up wages which leads to workers being laid off, limiting AS)
175
what is an example of businesses attempting to be more flexible
offering 0 hour contracts
176
how can flexibility be added to the labour market (mobility)
increase labour mobility
more info about job vacancies
make it easier to sack people (so more get employed
177
how do government improve geographical mobility
cut VAT
relax planning laws
178
what should happen to minimum wage
if it is above equilibrium, then it causes unemployment
some argue it should be scrapped to prevent real-wage inflexibility unemployment
179
what should happen to benefits to increase AS
reduce benefits to increase work and help reform labour market
180
what is universal credit for
to try and reform the labour market in the UK
181
why do we want to lower unemployment
reduces wasted resources, more G&S can be produced as the Labour Force is biggerf
182
arguing against trade unions
already very weak in the UK
reducing power further would have a very little impact
183
arguments against reducing benefits
would lower AD if those people can't get jobs causing more unemployment
184
what is a second reason to not cut benefits
it would have a multiplied effect as poorer people have a high MPC so a reduction in their income would result in a large fall in spending
185
what happens to QoL if worker flexibility increases
decreases as poeple feel less secure in their jobs and people work odd hours
also some people receive very low pay and this increases income inequality, reducing AD
186
How can increasing spending on education and training improve skills of the labour force
More educated workforce will be more efficient and do more skilled jobs, producing more G&S
187
What sort of training/education can be used to improve Quality and Skills of the Labour Force
Academic education
Free university
Secondary schools improvement
188
What can government do to improve the Quality and Skills of the Labour Force (regulation)
Regulation forces businesses to continuously train their staff, to keep them up with developments
189
Example of regulation that helps improve Quality and Skills of the Labour Force
Apprenticeship Levy
Tax on salaries in large companies where the money is held online for them to spend on training
Not very successful as quality and quantity of apprenticeships has fallen
190
How can increase in migration increase the Quality and Skills of the Labour Force
Lax rules for skilled immigrants has hoped to fill the job vacancies in the UK
191
How many unfilled job vacancies are there in the UK due to incorrect skills
800k
192
Why does improving Quality and Skills of the Labour Force increase AS
More efficient production of G&S
New technology developed
193
How can increasing spending on education and training help skills and quality of the labour force
Creates a more efficient workforce that can do more skilled jobs
E.g. more spending on schools, free university tuition
194
Who are the government working with to improve skills of the long term unemployed
Trade unions and firms
194
What have the government introduced instead of A levels
T levels
To focus on technical education
195
What could government introduce to increase businesses training staff
Regulation which forces it
196
What has the Apprenticeship Levy achieved
Taxed salaries from big firms are held online and can be used to spend on training
Not effective as there are lower quality and less apprenticeships
197
What can an increase in migration allow for
Higher skilled migrants improve workforce
They fill vacancies
198
What have government done for skilled immigrants in the UK
Lax rules to improve the shortage
199
How many unfilled vacancies are there in hte UK due to a skill gap
800k
200
What do improvements in skills mean for the Labour Force
More efficient so produces for G&S
201
What may happen if education is improved (issue)
Teaching skills not relevant to the skills gap incurs an opportunity cost as government money is lost from other sectors
202
What is the differential between South Korea’s and the UKs Investment
UK: 17%
South Korea: 35%
202
How can infrastructure be improved to increase AS
Offer tax incentives or subsidies on investment
203
What is a condition with educating the labour force
Time lag
More investment does not necessarily lead to better quality of educaiton
204
What could government do themselves to improve infrastructure
Spending on infrastructure such as HS2, Crossrail
204
What did the UK do to increase I as a % of GDP
Reduce corporation tax to 18% in 2020
205
What will improving infrastructure mean
New R&D for tech and more invested into new tech
206
What number is the UK in the world for infrastructure
24th
206
What did the Enterprise investment scheme achieve
Tax relief for those who buy shares in small companies when the finance is used for investment purposes
207
How can government help to improve infrastructure
They can directly invest themselves
208
Examples of government funded infrastructure projects
HS2
Crossrail
209
What number is the UK for infrastructure
24th
210
What are the issues with attempts to improve infrastructure
Opportunity cost as they lose tax revenue or have to spend on subsidies
Some businesses will not invest and just avoid tax
Not all investment is successful anyway
211
Unlike demand side policy, what can supply side policy do
Increase output and decrease prices
212
What does the fact that there are more long term policies for Supply side
Long term economic growth rather than small changes in economic growth
213
What can supply side policy increase
Exports which improves hte balance of payments
214
What are the two types of supply side policy
Market based and interventionist
215
What does the Keynesian LRAS curve show that supply side policy does
Nothing if LRAS is elastic so demand side policy must be used in the short term
216
What is the largest problem with supply side policy
Long time scale before they have an impact so less useful
217
What can be said about an economy needing to fix itself at a micro level
It has to be successful at a micro level to reach macro targets
218
What are the two macro objectives that go hand in hand
Growth and reducing unemployment
219
What can be said about most economic goals
One being achieved goes against the other
220
Problem of growth vs environment protection
As more resources are used, more pollution and habitat destruction occurs
221
Economic growth vs BoP
E.g. India where industry produces mainly goods for domestic consumption, but also it demands imports with few exports
222
Unemployment vs inflation
See Phillips Curve
223
What is the Phillips Curve
Growth > inflation
Growth > reduced unemployment
Inflation and unemployment have an inverse relationship
224
Expansionary vs deflationary fiscal and monetary policy
Expansionary increases AD but leads to inflation and may worsen BoP
Deflationary policies decreases AD but decreases employment and growth
225
Changes in IR impacting other macro goals
Increased IR to combat Inflation damages long term investment (MPC decreases)
Also causes SPICED affecting BoP
226
How do supply side policies affect macro goals
Increases AS > increases SR inflation (encourages I which increases AD)
227
How do fiscal deficits affect Macro goals
Government may reduce spending > decreases AD and SR growth, increased, lower tax revenue so ineffective policy
Also affects income inequality (poor who use gov services most are worst affected
228
Example of how do macro and micro policies have impacts on one another
Indirect taxes to fix a market failure could reduce competitiveness and decrease SRAS
