4.4 Macroeconomic Policy and impact on firms and individuals Flashcards Preview

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Flashcards in 4.4 Macroeconomic Policy and impact on firms and individuals Deck (62)
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1
Q

What is the largest component of AD?

A

Consumer Spending

2
Q

Define Aggregate Supply

A

The total quantity of output in the economy at a given price level

3
Q

Give 4 things that increase Long-Run Aggregate Supply

A
  • Productivity
  • Size of the labour force
  • Innovation and Enterprise
  • Capital Investment
4
Q

Give the 3 things that cause a shift in short term aggregate supply

A
  • Employment Costs
  • Cost of other inputs
  • Impact of the government (e.g. taxes)
5
Q

How do Employment Costs cause a shift in short-run Aggregate Supply?

A

Labour costs are affected by the level of productivity

6
Q

How do es the cost of other inputs cause a shift in short-run Aggregate Supply?

A

Things like the exchange rate can affect the price of key imported products

7
Q

How do the government cause a shift in short-run Aggregate Supply?

A

Environmental taxes like carbon duties raise costs for businesses

8
Q

Define ‘Full Capacity Output’

A

The maximum level to which aggregate supply can grow

9
Q

What happens when the economy’s at very high capacity and there’s an increase in AD?

A

There will be little economic growth and high inflation

10
Q

Define inflation

A

A sustained increase in the price level

11
Q

Draw the diagram for cost-push inflation

A

See Book

12
Q

Draw the diagram for demand-pull inflation

A

See Book

13
Q

Define ‘Multiplier Effect’

A

A ripple effect whereby one thing leads to another

14
Q

Define Fiscal Policy

A

The use of government spending and taxation to control AD

15
Q

What does expansionary fiscal policy entail?

A

Increasing AD

  • Cutting taxes to increase public spending
  • Increased government spending
16
Q

How can expansionary fiscal policy also have a benefit to AS?

A

Spending in the public sector trickles down to the private sector

17
Q

What does contractionary fiscal policy entail?

A

Decreasing AD

  • Raising taxes
  • Spending less
18
Q

Draw the graph for Expansionary Fiscal Policy

A

See Graph

19
Q

Draw the graph for Contractionary Fiscal Policy

A

See Graph

20
Q

Define direct tax

A

A tax that comes straight out of your wage

21
Q

Define indirect tax

A

A tax that you pay after receiving a wage

22
Q

Give 2 general advantages of fiscal policy

A
  • Small lag time

- Can also have a long term impact (e.g. investment into education)

23
Q

Give 2 general disadvantages of fiscal policy

A
  • Short term

- Can have unintended consequences

24
Q

Define Monetary Policy

A

The manipulation of interest rates, the money supply and the exchange rate to influence the Aggregate Demand

25
Q

What does SPICED stand for?

A
Strong
Pound
Imports
Cheaper
Exports
Dearer
26
Q

How do interest rates effect borrowing and saving

A

Interest Rate up

  • More saving
  • Less borrowing
27
Q

What is done to the interest rate for an expansionary monetary policy?

A

Decreased

28
Q

What is done to the interest rate for a contractionary monetary policy?

A

Increased

29
Q

How does increasing the interest rate effect the exchange rate?

A

Appreciation

30
Q

How are economic growth and unemployment related?

A

Inversely proportional

31
Q

Give 2 general advantages of Monetary Policy

A
  • Doesn’t create a government deficit

- Can control demand pull inflation

32
Q

Give 3 general disadvantages of Monetary Policy

A
  • Lag time of upto 2 years
  • Banks don’t have to follow it, it’s only a guideline
  • Does not control cost push inflation
33
Q

Define quantitative easing

A

An unconventional method of Monetary Policy, amining to stimulate bank lending by printing money and giving it to them in exchange for bonds

34
Q

Why was quantitative easing done during the recession?

A

Interest Rates could not be lowered any more

35
Q

How is Quantitative Easing extra inflationary?

A

Both inflation from creating money (Supply and Demand diagram) and from the increase in AD

36
Q

Give the 5 steps of Quantitative Easing

A
Create Money
Buy bonds with it
Reduces interest rates
People spend more
Creates jobs and boosts GDP
37
Q

Give a general advantage of Demand Side policies

A

Stimulates the economy if AD > AS

38
Q

Give a general disadvantage of Demand side policy

A

Won’t work if the unemployment is structural

39
Q

Give 5 Supply Side policies

A
  • Increase incentives to produce
  • Promote Competition to increase productivity
  • Reform the labour market
  • Improve the skills and quality of the labour force
  • Improve Infrastructure
40
Q

Define Supply Side policy

A

A policy that increases the total capacity of the economy to produce, thus affecting Aggregate Supply

41
Q

What is the main aim of Supply Side policies?

A

To increase the productive capacity of the economy

42
Q

Define ‘Market Based Policy’

A

Policies with very little government intervention, using the free market to increase AS

43
Q

Define ‘Interventionist Policy’

A

Policies using government intervention to correct any failures in the free market

44
Q

Give an example of a market based supply side policy by increasing incentives

A

Lowering tax rates to increase supply

45
Q

Give an example of an interventionist supply side policy by increasing incentives

A

Tax credits to make people better off in work

46
Q

Give an example of a market based supply side policy by promoting competition

A

Deregulating by reducing trade barriers

47
Q

Give an example of an interventionist supply side policy by promoting competition

A

Implementing competition policy

48
Q

Give an example of a market based supply side policy by reforming the labour market

A

Reducing employment protection / influence of trade unions

49
Q

Give an example of an interventionist supply side policy by reforming the labour market

A

Removing the minimum wage

50
Q

Give an example of a market based supply side policy by improving the skills and quality of the labour force

A

Training within a business

51
Q

Give an example of an interventionist supply side policy by improving the skills and quality of the labour force

A

Training in schools

52
Q

Give an example of a market based supply side policy by improving infrastructure (not too important)

A

Using private sector funds to fund pubic goods

53
Q

Give an example of an interventionist supply side policy by improving infrastructure (not too important)

A

Increasing public expenditure to pay for public goods

54
Q

Draw the diagram for a Supply side Policy

A

See Book

55
Q

Give 3 general advantages of Supply Side policies in general

A
  • Impacts all of the macroeconomic objectives
  • Sustainable
  • Antinflationary
56
Q

Give 3 general disadvantages of Supply Side policies in general

A
  • Very expensive
  • Long lag time
  • No guarantee they will work
57
Q

Name the 4 macroeconomic objectives

A
  • Stable inflation (2%)
  • Low unemployment
  • Economic Growth
  • Balance of Payment
58
Q

What does the Keynesian model say about expansionary policies?

A

They tended to be used for too long and so people were left unemplyed

59
Q

What did Keynes advocate to control the macroeconomic objectives?

A

An expansionary fiscal policy with high government spending

60
Q

What is the main issue with Keynes expansionary fiscal policy?

A

Inflation can get very high

61
Q

What does the Monetarist theory say is best to achieve the macroeconomic objectives?

A

Leaving the economy to evolve through market forces and not government intervention

62
Q

What does the Monetarist policy say about increasing interest rates?

A

It will only damped morale and cause instant inflation