Government Economic Policy Flashcards
(27 cards)
Additional objectives of macro policy
Reducing debt
Environmental sustainability
Access to public services
What does the Philips curve show
When the unemployment rate is low then wage pressures in the market are likely to be low.
What happens on the Philips curve as the rate of unemployment falls
Labour shortages may cause and increase in wage inflation and higher unit labour costs
What do neo-classical economists believe
That in the LR, output always returns to a long run equilibrium path
&
An economy will revert to a level of output where unemployment returns to the natural rate of unemployment
How is the long run Philips curve drawn
Vertical - it is independent of the level of SR demand/output and the general price level
What do successful supply-side policies that (among other aspects) help to do
- improve occupational mobility
- attract more people into work
- lift labour productivity
What do successful supply-side policies do
Lead to a fall in the natural rate of unemployment (frictional and structural) and this can lead to the LR Philips Curve to shift to the left
Why is the rate of inflation within the UK so low despite falling unemployment
- falling global commodity prices
- slow wage growth
- slowed real economic growth
Possible Conflicts Between Growth And Inflation
- accelerating inflation is greatest when SRAS is inelastic (low spare capacity)
- high inflation and a slow down in economic growth
What is the output gap
The difference between the actual level of GDP and it’s estimated level
What is a negative output gap
The level of actual GDP is less than potential GDP.
Some factor resources are under-utilised.
Higher unemployment and risk of deflation
What is a positive output gap
Actual GDP is greater than the estimated potential GDP.
Some resources work beyond capacity.
Demand pull and cost push inflation.
Conflict between economic growth and the balance of payments
When real incomes rise at a rapid rate, consumers will tend to buy more imports - leading to a worsening of the trade balance.
Fast growing counties also have high inflation which worsens their competitiveness.
Policies to reconcile growth / trade balance trade off
Supply side policies
XR depreciation
Sound / effective macro economic policies
Examples of external shocks
- World demand shocks
- World supply / price shocks
- World financial shocks
What are world demand shocks
These are associated with a rise or a decline in spending and confidence abroad
What are world supply / price shocks
These affect the global supply and prices of goods and services
What are world financial shocks
These occur in the global financial system, such as increased stress in the international banking system or financial markets
Evaluation point on external shocks
Not all of them are negative E.g. Some resulting from advances in production technologies
Key external influences on the UK economy
- fluctuations in global equity and bond markets
- longer term shifts in competitiveness / trade
Effect on inflation and interest rates
Low inflation = imports cheaper, lower prices in the supply chain, no pressure in bank to start rising interest rates
Effect of falling global commodity prices on economic growth
Stronger in the short term - real incomes are higher for consumers and business profits rise as supply costs fall
Effect of falling global commodity prices on unemployment
Help bring unemployment down but some industries might be negatively affected e.g. renewables
Effect of falling global commodity prices on balance of trade
Improved - the U.K. is a net importer of many commodities
