Fiscal and Supply side policy Flashcards
(24 cards)
4 effects of expansionary fiscal policy
- economic growth
- unemployment
- Distribution of income
- CA
2 Positives of automatic stabilizers
- reduces large fluctuation from trend rate growth
- reduces need for discretionary fiscal policy
2 examples of automatic stabilizers
benefits
progressive tax system (fiscal drag)
3 evaluation points of Fiscal policy
- National dept (FDI, future shocks)
- Crowding out
- inefficiency
what is a structural budget deficit
- when an economy is running at full capacity however government still has budget deficit
what is a cyclical budget surplus
- budget surpluss in a boom
how will austerity worsen a budget deficit
- if GDP falls faster than the rate of dept
- dept as a percentage of GDP will increase
what is the crowding out effect
- governments issue bonds, increase demand for loanable funds therefore interest rates increase
what is the crowding in effect
- Increased Gov spend creates good conditions for investment.
- confidence in long term growth (multiplier effect + infrastructure investment)
- firms invest in order to capitalize on increased demand
when does the crowding in effect occur
- when there is a negative output gap and interest rates are already low
- confidence is high (SS shocks)
Why are supply side policy’s good
of successful they hit all four macro objectives
three examples of interventionist SSP
- spending on education, health, infrasturcture
- subsidies to firms to promote investment to strategic sectors or for innovation
three examples of Market based SSP
- competition policy’s
- labour market reforms
- trade libralization
- tax insentives
effects of monetary policy
- Inflation
- CA deficit
- unemployment
- financial market stability (safe borrowing, discourage household debt)
2 evaluation of monetary policy
- liquidity trap (confidence)
- time lags
what are the monetary policy instruments
exchange rates
open market operations
interest rates
what order does the monetary policy transmission mechanism work
Change in bank rate
➡
Market rates, house/asset prices, expectations/confidence, exchange rates
➡
domestic demand and external demand
➡
exchange rates effect import prices
➡
all of this culminates to a change in inflation
how long do interest rate changes take to effect inflation in the uk
2 years
by how much will a 1% change in the interest rate effect inflation
0.2% - 0.4%
3 ways that BOE changes interest rates by manipulating’s supply of money
- Reserve requirements
- discount rates
- Open market operations
Explain process of QE
- central bank creates electronic money
- money is used to buy financial assets like bonds replacing illiquid assets with liquid ones
- demand for gilts increases, decreasing yields therefore decreasing cost of borrowing
- the injections of cash into the economy increases the supply of money therefore making banks more liquid therefore more confident to give out loans reducing prices of borrowing to firms
- this stimulates consumption and investment
advantages of QE
stimulates growth and speeds up the rate of recovery after a resesion (sound gov finances, ecouraging investment in riskier assets, encouraging borowing therefore reducing unemployment)
- growth
- recoveru time
- unemployment
- confidence in banks
- reduced cost of borrowing for governments
- risky asset investment
4 disadvantages of QE
- increases wealth and income inequality
- asset bubbles could create more risk
- risk of inflation
- No guarantee banks will lend money they receive out.
what is expansionary fiscal contractionism
Reducing government intervention increases LR growth (reducing borrowing costs to gov through greater confidence)
- austerity
