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CIMA shortened > Chapter 7: Inflation, Fiscal policy and monetary policy (1/3) > Flashcards

Chapter 7: Inflation, Fiscal policy and monetary policy (1/3) Flashcards

1
Q

How is inflation measured?

A

RPI - Retail price index
-> compares the price of a basket of goods against a similar basket in 1987 (base year)

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2
Q

Who sets the UK target for inflation

A

The Bank of England Monetary Policy Comittee sets interest rates with a view to meeting the inflation target over the next two years

Current target ~ RPIX 2%

RPIX goes +/- 1% BoE has to write a letter

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3
Q

What is RPIX?

A

RPI excluding mortage interest payments

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4
Q

What are the 4 consequences of inflation

A

1) Wealth distribution - FIxed income suffers, borrowers real debt decreases, savers real savings decrease

2) BoP - Increase in inflation - Increase costs of UK goods - Weakening of £

3) Uncertainty - More difficult to plan for future - Prevent investment - damages demand

4) Costs of changing prices - As on tin and harder to compare prices

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5
Q

What is hyperinflation?

A

When inflation becomes excessive
e.g. Zimbabwe

Solution -> currency substitution (eg. US $)
Stop printing bank notes

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6
Q

What are the two main causes of inflation?

A

-Cost Push
-Demand pull

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7
Q

What is the cost push?

A

Increase of cost of production- Increase prices (so firms maintain profits)
Decrease supply

Price level vs nation insurance AS shifts inwards, increasing price and decreasing income

Costs of production increases due to wages, oil prices and imported goods

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8
Q

What is her wage spiral?

A

Firms increase price, prices increase further, wages demand increase

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9
Q

What is demand pull

A

When AD of goods and services&raquo_space; AS
excessive growth in AD results in inflationary gap
Inflationary gap - excess prices that have no impact on national income

AD moves out

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10
Q

What is the relationship between inflation and unemployment?

A

Want to keep both low
HOWEVER,
Inverse relationship between them
Any attempt to decrease unemployment below natural rate increases inflation

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11
Q

What is NAIRU?

A

Non accelarating inflation rate of unemploymeny

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12
Q

What is a phillips curve?

A

Inf (%) vs Unemployment (%)

Doesnt account for stagflation

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13
Q

What is an expectations augmented phillips curve?

A

TO DO

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14
Q

What is fiscal policy?

A

use of gov spending, tax and borrowing

to influence economic activity, AD, output and employment
affects AD and AS

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15
Q

FP is an instrument of demand, what does that mean?

A

-FP smooths out any volatility in real national output when economy experiences external shock

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16
Q

Keynesian view of FP:

A

FP works when operating below full capacity national output or when there is need to provide D-S

gov justiefied to use FP to manage AD

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17
Q

Monetarist view on FP:

A

FP only has short term impact on AD
scepital

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18
Q

FP: decrease income tax?

A

increase disposable income increase consumer demand

19
Q

FP: decrease indirect taxes (spending)?

A

increase real income increase consumer demand

20
Q

FP: decrease corporate tax?

A

increase post tax profit increase capital spend

21
Q

FP: decrease interest tax

A

increase disposable income increase consumer demand

22
Q

Name three types of gov spending

A

transfer payments - welfare etc
current gov spending - state G+S (NHS, edu, defence, wages etc)
capital spending -add to economys capital stock ( important D?S effects in long term

23
Q

Justification of gov spending

A

provide public goods and merit goods (at socially efficient level
saftey net (welfare)
Necessary infrastruction - capital spending
manage AD

24
Q

What are the canons of tacation

A

CCEE
Certaintym - easy to predict
Convenience - easy to pay
Equity -fair
Economy - cost effective collection

25
Q

5 types of tax

A

Direct - income, wealth, profit
Indirect - spending (VAT, customs, excise)
Progressive - marginal rate of tax increases with income
Proportional - marginal rate of tax constant
Regressive - marginal rate of tax decreases with income

26
Q

What is the laffer curve?

A

tax revenue vs tax rate
reverse parabola
T* = peak - optimum tax rate

increase tax, increase avoidance and increase motivation to work

27
Q

What is a balanced government budget?

A

G=T balance

> deficiy
< surplus

Excess called PSNCR public sector net cash req

28
Q

what effects does FP have on AS

A

1) labour market -decrease income tax increase motivation
2) Capital spending
3)entrepreneurship - gov can boost no of small startups
4) R& D & I : in priv sector, increase competitiveness
5) increase human capital, increase education, training, health

29
Q

What do free market economists believe

A

decrease in gov spending decrease in taxation

30
Q

What is monetary supply

A

using interest rates and level of money supply to manage the economy

31
Q

Who controlls interest rates?

A

Bank of England Monetary Policy committee
-set at monethly meetings to meet inflation rate targets
-

32
Q

How can MP reflate the economy?

A

Cut IntR
Increase money supply

Cutting interest rates increase money borrowed, increase disposable income increase investment increase AD increase growth increase unemploymeny

33
Q

How can MP deflate the economy

A

Increase IntR
Decrease money supply

34
Q

How do you influence money supply

A

-Alter bank reserve requirements
-change banks ability to lend

35
Q

Quantity theory of monet

A

MV=PT, V and T are constant
hence Money supply directly effects price level

36
Q

What are the two ways to hedge interest rate risk?

A

FRA

IRG

37
Q

What is an FRA

A

Forward rate agreement
-contract fixes target interest rate
-hedges adverse and favourable movements

38
Q

What is an IRG

A

Interest rate guarantee
-buy an FRA for a period of time
adverse - use FRA
IRG - let it laps

IRGs are expensive

39
Q

What are supply side policies

A

-those that improve efficiency and improve AS in an economy
(push AS out)
-long term growth

40
Q

What are e.g.s of supply side policies

A

Increasing competition
Increasing efficiency of labour
Encourage firms to invest

41
Q

FP: advantage and disadvantage

A

GOOD: short term AD and target specific sectors
BAD: Potential for inflationary tendencies and debt burden of economy

42
Q

MP: advantage and disadvantage

A

GOOD: controls inflation
Bad: not flexible to industry

43
Q

SS: advantage and disadvantage

A

GOOD: non inflationary, no increase in gov borrowing increase global standing
BAD: LOng term, can impact inflation in short term

CIMA shortened (15 decks)

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