Economic Policy Flashcards
(109 cards)
1
Q
Explain the two types of economic policies
A
Demand-side policies - mainly affect aggregate demand
Supply-side policies - mainly affect aggregate supply
2
Q
What are the two types of demand-side policies
A
Fiscal policy
Monetary policy
3
Q
Who decides supply-side policies
A
The government
4
Q
What is fiscal policy decided by
A
The government
5
Q
What is monetary policy decided by
A
The central bank e.g. the Bank of England
6
Q
What is fiscal policy
A
When the government changes tax and government spending to influence the economy
7
Q
What would be the fiscal policy to get a country out of recession
A
Increase government spending and decrease taxes
This increases injections into the circular flow and decreases leakages
This expands the size of the economy
8
Q
What is expansionary fiscal policy
A
When the government increases spending and decreases taxes
9
Q
What is another word for expansionary fiscal policy
A
Loose fiscal policy
10
Q
What is contractionary fiscal policy
A
When the government decreases spending and raises taxes
This increases leakages of the circular flow and shrinks the economy
11
Q
What is another word for contractionary fiscal policy
A
Tight fiscal policy
12
Q
What is are 6 examples of fiscal policy
A
Changing income tax
Changing benefits
Changing corporation tax
Changing Healthcare and Education spending
Changing VAT
Changing Infrastructure spending
13
Q
What would the government do with regards to income tax if they were following expansionary fiscal policy
A
Decrease income tax
14
Q
Give an example of expansionary fiscal policy
A
Decreasing the top rate of income tax from 45% to 40%
Increases disposable income
This increases consumption and increases AD
This causes a multiplier effect
15
Q
What is an specific example of government benefits
A
£73 per week Job Seekers Allowance if you have recently lost your job and actively seeking for a new one
16
Q
How do you evaluate increasing economic benefits to increase economic growth
What is this phenomena called
A
May disincentivise recipients to work
The “benefits trap”
17
Q
If you were following contractionary fiscal policy what do you do to benefits
A
Decrease
18
Q
What does increased benefits do to the consumption and government spending components of AD
A
Does nothing to government spending - it’s not paying for anything it’s just transferring money to households
Increases consumption because recipients spend that money
19
Q
How does contractionary fiscal policy on corporation tax affect the economy
A
Increased corporation tax which will increase tax revenue to balance or budget or increase government spending
This shifts AD to the right
20
Q
What is the evaluation to contractionary policy on corporation tax
A
Firms will make less profit
Won’t be able to invest in new machinery
This decreases AD and decreases growth
21
Q
What is a real world example for following expansionary fiscal policy with regards to corporation tax
A
In 2017 the UK capped corporation tax at 19%
Ireland - 12.5%
22
Q
What will happen if the corporation tax is reduced
A
More profits means reduced costs so there will be a right shift of SRAS
More profits means more investment in new machinery so increased capital so a shift of LRAS to the right
23
Q
What is the negative to expansionary fiscal policy on corporation tax
What is the AO2 mark for this
A
Decreased tax revenue so decreased government spending which decreases AD and economic growth
Benefits decreases and inequality worsens
Between 2010 and 2016 corporation tax cuts lost the government $16.5 billion pounds in corporation tax revenue
24
Q
What is the evaluation to the expansionary fiscal policy on corporation tax
A
It assumes that firms will reinvest the new profits into new machinery
25
What is an example of expansionary fiscal policy on education spending
Could provide subsidiaries for university degrees which would encourage more students to go to university because of the lower price who will learn new skills and become more productive in the workplace
This will shift LRAS to the left
26
What is expansionary fiscal policy on the NHS
How does it affect the economy
Increase funding for the NHS which means more doctors and nurses
This will lead to a healthier workforce and an increase in productivity which shifts LRAS to the right
Because of the improvement of the NHS workers will have longer life expectancies so they will be able to work more hours which will shift LRAS to the right again
27
What is the evaluation for the expansionary fiscal policy on education
Will only help if students choose courses that actually improve their productivity
28
What is the evaluation for expansionary policy on the NHS
Only works if the funding goes directly to treating illnesses
Some funding goes into writing paperwork and admin known as 'bureaucracy' and some funding goes into cosmetic surgery
These things don't help the productivity of workers
29
In 2017 what was the spending on schools and the NHS in the UK
Schools - £41 billion
Hospitals - £141 billion
30
What is contractionary fiscal policy on the NHS
Healthcare cuts - this will force the NHS to be more efficient and provide more effective treatments which improves workers health and in turn their productivity
31
What is contractionary fiscal policy on education
Stopping university subsidies - forces students to enter labour market after school
This will increase the labour supply and will decrease wages
This decreases firms costs and shifts SRAS to the right which increases real GDP and economic growth
32
What is the evaluation for contractionary fiscal policy on healthcare and education
Government spending will decrease so AD will decrease and real GDP will decrease which will slow economic growth
33
What is the evaluation for contractionary fiscal policy on the NHS
If the NHS doesn't get anymore efficient illnesses will be left untreated and will lead to less productive workers
This shifts LRAS inwards and decreases real GDP
34
What is the evaluation for contractionary fiscal policy on education spending
Students won't learn skills needed in the future like comp sci which decreases productivity and shifts LRAS to the left
35
What was the VAT in 2017 in the UK
20%
36
How does contractionary fiscal policy on VAT help the economy
Increased tax revenue so decreased budget deficit
37
What is the negative of contractionary fiscal policy on VAT
Higher costs for firms so a shift to the left of SRAS which decreases real GDP
38
What is the projected cost of HS2
£75 billion
39
What is the evaluation for expansionary fiscal policy in general
When the government increases spending it could crowd out private firms by using up their resources or by pushing up the cost of borrowing
40
Describe how the construction of HS2 could lead to the two types crowding out
When the government borrowed £50 billion to spend on land, labour and capital it increased the prices of these but it also increased the interest rate
This increases firms costs and causes a right shift of supply
If the government needs all these resources to build it and if the economy is operating at YFC then there will be no more resources left for private firms
41
What are the two types of crowding out
Resource crowding out
Interest rates
42
What is monetary policy
When the central bank manipulates the base interest rate or the money supply in order to influence aggregate demand
43
What is the relationship between the interest rates high street banks charge on consumers and the base interest rate set by the bank of England
The high street banks will follow what ever the base interest rate that is set
44
What is the base interest rate
The amount of interest that the central bank places on high street banks when they borrow from the central bank
45
What will the bank of England do if the inflation rate is below the target
Decrease the base interest rate - high street banks will follow suit
Consumers will then have a lower return on savings which will decrease MPS and increase MPC which increases consumption and AD
This will increase the inflation rate
46
What is expansionary monetary policy
Decreasing base interest rate to increase consumption in order to rise inflation
47
What is contractionary monetary policy
Increasing the base interest rate to decrease consumption and reduce inflation
48
What is a real world example for expansionary monetary policy to get out of a recession
In order to recover from the 2008 financial crash the MPC cut the base interest rate several different times
It went from 5.5% - 0.5% from Feb 2008 to March 2009
49
What is the problem with the expansionary monetary policy
1 in 6 people in the UK are pensioners who rely on returns from savings for income
If the interest falls then there will be less disposable income to spend for pensioners which decreases consumption and shifts AD to the left and decreases the GPL
50
What is a real world example of contractionary monetary policy
In 2017, inflation was at 3%
So the bank of England increased the base interest rate from 0.25% to 0.5% to make sure it doesn't increase and fall out of the target range
51
What are the four main things that changing the base interest rates affect
Savings
Mortgages
Investment
Net exports
52
How does expansionary monetary policy affect the wealth effect
The interest rate on mortgages decreases so cost of mortgages go down so more people can afford to take out a mortgage to buy a house
This will increase the demand for houses which will cause house prices to increase so homeowners will see an increase in the value of their houses so there will be a positive wealth effect
53
What impact does a positive wealth effect have on an economy
Feel wealthier so they will spend more
Increasing consumption and AD which increases real GDP and economic growth
54
What is an AO2 mark for the wealth effect in Europe
The wealth effect is 0% in the EU shown by the research of Ricardo Sousa
55
Why is the wealth effect 0% in Europe
Increased house prices causes people that are saving up for a house feel poorer
So these feelings cancel out the positive wealth effect
56
What is an AO2 mark for home ownership in the UK
76% of people don't own their homes in the UK
57
What is the evaluation on expansionary monetary policy on mortgages
Assumes that the majority of people own homes and are recipients of the positive wealth effect
58
How does expansionary monetary policy on investment affect the economy
Decreased base interest rate so cost of borrowing goes down so firms are more likely to borrow which increases investment and more likely to invest into new machinery which LRAS and AD to the right
59
What is the evaluation for the expansionary monetary policy on investment
What is the AO2 for this
If base interest rates are low firms won't necessarily borrow
In 2009 the interest rate was at 0.25% with low animal spirits and people weren't spending so firms were reluctant to borrow from banks to invest in machinery because they wouldn't be able to repay their loan if their products didn't sell
60
What is a con for contractionary monetary policy on investment
If you increase base interest rate then firms will owe the banks more money which will increase costs and shift SRAS to the left
61
How does contractionary monetary policy affect imports and exports
Higher base interest rate increases returns on savings
It will become more profitable to save at that country's banks so foreign investors will save their money there
In order to do this they will demand the country's currency
SPICEE
This will decrease AD
62
What is the evaluation for contractionary monetary policy affecting imports and exports for the UK
The UK is a net importer of raw materials
Stronger pound means cheaper imports so materials will also get cheaper so firms costs will decrease so firms can reduce their prices
This means UK exports will be cheaper comparatively and will increase demand for UK exports - export revenue will increase
If exports are cheaper domestic consumers will buy UK goods and import expenditure will decrease
This will cause AD to shift right and improve the current account deficit
63
What will happen if expansionary monetary policy is pursued when it comes to imports and exports
Lower base interest rate so lower returns from savings
Investor won't want to invest in that country anymore and sell the currency
64
What is quantitative easing
Bank of England electronically creates new money
Uses new money to buy financial assets such as government bonds from high street banks
This increases the money supply of those banks so they will lend more to consumers and firms who can consume and invest
65
How does quantitative easing effect exports
Increased supply of pounds decreases the exchange rate and causes a depreciation in the value of the currency
Weaker pound means more expensive imports and cheaper exports
This will increase the demand for exports and increase net exports and shift AD to the right
66
What is the AO2 mark for quantitative easing
In the UK between 2009 and 2012, the MPC created £375 billion
67
What is the evaluation for quantitative easing
Since there is a higher supply of money people can afford to bid higher prices on things
An increase in AD also leads to increase in GPL
A very large round of QE can risk hyperinflation
68
What is the AO2 for the evaluation of quantitative easing
1920's Germany
Price of bread went from 200 marks to 200 trillion marks
69
What is the gold standard
How much a currency was in terms of gold
70
Explain how the commitment to the gold standard caused the Great Depression
Wall street crash led to diminishing consumer confidence
People swapped their money for gold for safekeeping
As people did this the money supply decreased and because of this people consumed and invested less
This led to negative economic growth
71
What was the response to the Wall Street crash with regards to trade in 1929
In 1929 Herbert Hoover placed restrictions on importing goods to protect American industry in response to the crash
He increased the price of foreign bananas, wheat and sugar in the hopes that US consumers would get domestic products so firms would stay open, employ people and the money supply would increase
72
Why did the response to the Wall Street crash with regards to trade in 1929 backfire
The countries that suffered as a result of this restriction (Canada, Italy and Spain) placed restrictions on American products
So firms in the US had fewer people to sell their products to
This repeated until world trade collapsed
Firms that relied on exporting had to shut down which increased unemployment and led to a negative multiplier effect
73
How did the fiscal policy implemented in the US in 1929 backfire
It was imperative that there was a balanced budget
The government increased taxes and cut government spending
Reduced economic growth even further
74
How did the approach to monetary policy in 1933 backfire
In order to prevent people swapping money for gold the government raised interest rates
This discouraged investment and consumption and shifted AD inwards
75
What are the three things that Hoover did in the early 90's that caused the Great Depression
Restrictive trade policy
Contractionary fiscal policy
Increased interest rates
76
What are the three things that FDR did to get the US out of the Great Depression
Expansionary fiscal policy
Abandoning the gold standard
To remove the restrictions on imports
77
Explain FDR's approach to fiscal policy and the effects of it
Increased government spending to the equivalent of 10.7% of the GDP, taxes were cut and infrastructure was built
This increased employment which increased RDI which increased consumption and investment which increased AD
78
Explain how FDR's approach to the gold standard helped the US economy
It was made illegal to convert dollars to gold
This meant that the central bank was free to increase the money supply in the economy by decreasing interest rates
This led to an increase in consumption and investment which leads to an increase in AD
79
Explain how FDR's approach to trade policy helped reduce the Great Depression
Removed import restrictions
Americans could export to foreign countries again and this meant that producers needed to hire more workers
This means that unemployment goes down and the RDI of those people increase which increases consumption and investment which increases AD
80
Give numbers that show the Great Depression affected the UK
81
What is the bad decision that the UK made during the Great Depression
Enacted a contractionary fiscal policy to balance the budget
82
What are the two reasons that meant that the Great Depression didn't have as much as an effect on the UK
Expansionary monetary policy
Abandoned the gold standard
83
What were the effects of the 2008 financial crash in the UK
84
What were the UK's responses to the financial crash in 2008
Expansionary monetary policy
Expansionary fiscal policy
85
What were the differences between the approach to the financial crash in 2008 and in 1918 in the US
Cut interest rates from 5.25% to 0%
QE - $4.5 trillion into the economy
Expansionary fiscal policy - government spending and tax cuts equivalent to 6% of the US GDP
86
What is interventionist supply-side policy
When the government increases its intervention in the economy
87
What are the two types of supply-side polices
Interventionist
Market-based
88
What are market-based supply-side policies
When the government decreases its intervention in the economy
89
What is an example of interventionist supply-side policies
Infrastructure spending
90
What is an example of market-based supply-side policies
Decrease in tax
91
What is the evaluation for infrastructure spending
Crowding out
92
What is reducing corporation tax an example of in terms of supply-side policies
Market-based
93
What is the evaluation for reducing corporation tax
Reduces tax revenue so government spends less shifts AD to the lift
94
What is a reduction in minimum wage in terms of supply-side policies
Market-based
95
What is the evaluation for reducing the minimum wage
People that earn minimum wage will have less disposable income so they will consume less and invest less so AD will shift left
Immigrates will emigrate to other countries and the quantity of labour will decrease and and LRAS will shift to the left
96
What is the argument for reducing the minimum wage
Reduced costs for firms
SRAS shifts to the left
97
What is deregulation
When regulations are removed from markets to lower barriers to entry
98
What is the AO2 mark for deregulation
How did this affect the economy
1970s - US regulators only allowed certain airlines to fly certain routes but in the airline deregulation act they were removed and new airlines could fly anywhere they wanted
They could fly cheaper and shorter routes which decreased airline costs and shifted SRAS to the right
99
What is privatisation
When the government transfers ownership of a public sector firm to the private sector
100
What is the AO2 mark for privatisation
1980s - Margaret Thatcher privatised BT and sold it to private investors
These investors pressured BT to maximise profit causing BT to cut costs and increase SRAS
101
What is the evaluation for increasing spending on education
Uni students aren't working
Decreases labour supply and decreases SRAS
102
What is the demand-side effect of reducing income tax
Disposable income goes up
Consumption goes up and AD shifts right
103
What is the supply-side effect of reducing income tax
Disposable income goes up so workers are incentivized to work more hours
Increases labour supply
Pushes down wages
Decreased costs for firms so SRAS will shift to the left
104
What is the evaluation of reducing tax income
If people have more disposable income they work fewer hours because they have enough money to pay for necessities
Labour supply decreases and wages increase
Firms costs go up and SRAS shifts to the left
105
What type of supply-side policy is reducing benefits
Market-based
106
What is the argument for reducing benefits
People will have less RDI
Will be incentivized to work
Increase the supply of labour
Decreases wages
Decreases firms costs which shifts SRAS to the left
107
What is the evaluation for reducing benefits
Reduces RDI
Reduces consumption and AD
108
What is the AO2 mark for reducing benefits
UK reforming disability benefits 2015
Restricted it to people that actually needed it
109
What is the AO2 mark for increasing healthcare spending
Estimated that British firms lose £77 billion annual loss in worker productivity due to ill health
