Macro 3.2.4 Macroeconomic policy Flashcards
(22 cards)
what are the macroeconomic objectives of the government
- Trade - balanced
- Inflation - low and stable (2%)
- Growth - strong, sustained and sustainable
- Employment - full employment
- Rest - distribution of income, environement sustainability, producitivty growth
what is monetary policy
actions undertaken by the banks to influence the supply of money in the economy
whhat are the 3 monetary policy tools
- interest rates
- quantitative easing / tightening
- forward guidance - say they will chnage interest rates to encourage or dicourage investment but dont have to
explain quantitative easing
- the central bank buy financial assets like government bonds from other banks
- when the assets are bough it credits the banks’ reserves with money creating an njection into the circular flow of income
- as buying the bonds the central bank raises bond prices and lower their yields to help reduce long term interest rates and make borrowing cheaper
- banks are more likely to lend money with more reserves and lower yields and lower interest rates will increase consumption
- this boost economic activity casuing AD to shift right as consumption is a compoennt of AD, causing a positve output gap and put inflation around 2%
what are the pros and cons of monetary policy
Pros:
* consumption, investment and net exports affected with positive multiplier gains (inital increase investment, government spending or net exports stimulates greater consumption and increase AD)
* dual impact on AD and AS reducing unemployment
Cons:
* demand pull inflation
* time lag (18 months)
* reactions may not be as expected
* interest rates can fall below 0
what does monetary policy depend on
- initial level of economic activity
- level of consumer/business confidence
- size of multiplier
- level of change in interest rates
- offset by other factors
what are the functions of money
- medium of exchange
- store of value
- measure of value
- standard of deferred payment
what are the characteristics of money
- acceptable - portable
- durable
- divisible
- limited in supply
- difficult to forge
what are the 3 types of money
- notes and coins
- deposits - pay sum of money in advance
- near money - non cash assets but easily converted into cash
define liquidity
how easy money can be converted into cash
what is the difference between commodity money vs fiat money
commodity money is any money that always has intrinsic value (gold) whereas fiat has no intrinsic value (notes and coins)
if hyperinflation occurs the fiat money becomes worhtless
how is the money supply measured
- narrow money supply is also known as M0 (notes / coins in the economy and amount of deposits, only very liquid forms)
- broad money supply also known as M4 (non fiancial assets)
as move from M0->M4 add more non fiancial assets
what is expansionary monetary policy
increase AD causing AD to shift to the right
- increase inflation
- increase growth
- reduce unemployment
transmission mechanism:
* reduce credit and interest rates to increase consumption
* decrease saving rates to increase consumption
* decrease mortage rates to increase consumption
* decrease rates on business loans to increase investment
* weaker exchnage rate to increase net exports
what is contractionary monetary policy
decrease AD causing AD to shift to the left
- decrease inflation
- prevent asset/credit bubbles
- reduce excess debts or promote saving
- reduce current account defecit
what is fiscal policy
controlled by the government and its a chnage to government spending and taxation in order to influence AD
what is expansionary fiscal policy, reasons for it and policy examples
boosting AD causing a rightward shift in AD
* boost growth
* reduce unemployment
* increase demand pull inflation
* redistribute income
examples:
* reduce income tax
* reduce corporation tax
* increase in government spending
what is contractionary fiscal policy, reasons for it and policy examples
reducing AD causing a leftward shift in AD
* reduce inflation
* reduce budget defecit
* redistribute income
* reduce current account defecit
examples:
* increase in income / corporation tax
what are free ports and what are their effect
free ports are **areas idnetified in the UK government with high growth prospects as prior demand wasnt good **and wanted to stimulate demand so pay very low tax in area to create a local multiplier effect, this makes exports cheaper for producers in the UK and furhter stimulate economic growth
what is meant by the multiplier effect
multiplier effect occurs when an initial injection into the circular flow of income (like investment, government spending or exports) leads to a greater national income as ones persons spending is another persons income create a ripple effect of spending and income
- injection into economy -> this money becomes income for others like workers -> they spend part of it increasing demand more -> process repeats of spending but each time there are small leakages
what is the difference between demand side and supply side policies
Supply side policies:
* focus on improving potential output by improving effeciency and productivity
* improving quantity or quality of capital goods will increase AS
* investment in education, infrastructure, healthcare, research and development, reduce dorporation tax, deregulation, privitisation, free ports
demand side policies:
* aim to boost total spending in the economy and influence demand
* policies used to stimulte any component of AD
* monetary policy, fiscal policy, reduce corporation tax
what are the 2 types of supply side policies
- interventionist - actions taken by the government such as investments or subsidizing
- Non-interventionist - actions that happen within the free market
what is fiscal drag
the deflationary effect of a progressive taxation system on a countrys economy
As wages rise, a higher proprotion of income is paid in tax
