macro policies Flashcards
(101 cards)
1
Q
Describe fiscal policy
A
the use of Governments spending, taxation, borrowing, to affect the economy
2
Q
Define budget deficit
A
Government spends more than it receives in tax
3
Q
Define budget surplus
A
Government receives more than it spends
4
Q
What is the traditional timing for fiscal policy announcements in the UK?
A
Autumn statement in November, Budget in March
5
Q
Explain Public Sector Net Cash Requirement (PSNCR)
A
Gov. Borrowing of the public sector, occurs in budget deficit
6
Q
How does a budget deficit affect aggregate demand?
A
Increases aggregate demand, it is an expansionary fiscal policy
6
Q
How can a budget deficit occur?
A
Increase in government spending, lowering of taxes
7
Q
Explain the impact of fiscal policy on macroeconomic indicators
A
Affects everyone in the economy, influences macro indicators
8
Q
Describe the relationship between budget surplus and national debt
A
Negative PSNCR, money is given back to national debt
9
Q
What is an expansionary fiscal policy?
A
Increase in government spending, lowering of taxes
10
Q
How does fiscal policy relate to aggregate demand
A
it is a demand side policy and affects the level of aggregate demand
11
Q
what is an expansionary fiscal policy aim
A
Government budget deficit, increases aggregate demand
12
Q
Describe the effect of a budget surplus on aggregate demand and how it could occur
A
Reduces aggregate demand by cuts in gov. spending and increased taxation, which shifts AD curve left
13
Q
Explain the role of fiscal policy in the economy (3)
A
- Improves macroeconomic performance,
- distributes income and wealth,
- corrects market failure
14
Q
How does deflationary fiscal policy affect aggregate demand
A
Reduces aggregate demand, shifts AD curve left
15
Q
What is the multiplier effect in fiscal policy
A
Direct effect on aggregate demand, amplifies economic impact
16
Q
Describe automatic stabilisers
A
Expenditures that rise in recession, fall in boom
Designed to automatically adjust gov. Spending and taxation in response to economic fluctuations
17
Q
Explain the relationship between fiscal policy and the output gap
A
Expansionary for negative output gap to increase AD, deflationary for positive gap do decrease AD
17
Q
How does demand management use fiscal policy
A
influences aggregate demand, GDP, macroeconomic objectives
18
Q
Define discretionary fiscal policy
A
Deliberate use of tax and spending, not relying on automatic stabilisers
19
Q
What is the trend rate of GDP
A
Potential GDP, target for fiscal policy
20
Q
Describe the impact of government spending on aggregate demand
A
Increases aggregate demand, shifts AD curve right
21
Q
Explain the significance of fiscal policy diagrams
A
Visual representation of fiscal policy effects, multiplier effect
22
Q
How can fiscal policy correct market failure
A
Intervenes in inefficient markets, reallocates resources to try and change the distribution of income
23
What policy during a negative output gap
Expansionary fiscal policy to boost AD, budget deficit
24
What policy during a positive output gap
Deflationary fiscal policy to cut AD, budget surplus
25
Describe the relationship between taxation and aggregate demand
Increase in taxation reduces aggregate demand, shifts AD curve left
26
Describe the impact of recession on unemployment and government benefits
Increased unemployment, higher social security payouts
27
Explain how government benefits affect aggregate demand during a recession
AD falls less, people spend benefits on consumption
28
Define the government's fiscal policy response during an economic boom
Reduced spending, increased tax revenues
29
How does increased taxation affect consumer spending?
Less spending, more income goes to government
30
What are the trade-offs in achieving macroeconomic objectives through fiscal policy?
Inflation vs growth, unemployment vs inflation
31
Do expanding fiscal policies always lead to positive economic outcomes?
increasing economic growth causes inflation
32
Explain the relationship between fiscal policy trade offs and balance of payments
tightening fiscal policy trying to increase BoP (increasing exports) through lowering prices causes unemployment
33
How does tightening fiscal policy impact economic growth?
Slows growth, causes unemployment, with aim to decrease consumption and inflation
34
What is a consequence of spending money to create jobs?
Causes inflation
35
expansionary (loosening) monetary policies examples
- Lowering interest rates
- increasing quantitive easing
36
contractionary (tightening) monetary policy examples
-raising interest rates
- reducing quantitive easing
37
what is a demand side policy
a set of gov. actions to manage the level of aggregate demand in the economy
38
what are the 2 main tools for demand side management
fiscal and monetary policy
39
what is quantitive easing
BoE creates new electronic money then purchases assets, such as government bonds, from financial institutions like banks (eg. Barclays)
By purchasing bonds, BoE provides high-street banks with more money. In theory, the general public then borrows and spends this newly created money, which increases aggregate demand
40
how can income be redistributed
through taxing and spending
41
examples of gov spending that can influence behaviour through fiscal policy
Provision of public goods, Taxing demerit goods
42
main macroeconomic objectives influenced by fiscal policy
- Economic growth
- Inflation
- Unemployment
- Balance of payments
43
impacts of fiscal policy beyond macroeconomic objectives
Distribution of income, Environmental aims, Public services, Balanced budget
44
What is the role of the Office of Budget Responsibility (OBR)?
Independent view on public sector finances, Economic forecasts
45
Define the golden rule in fiscal policy
Borrow only to invest, Not to fund current spending
46
What does the sustainable investment rule state?
National debt should be below 40% of GDP
47
Describe the belief of classical economists regarding government borrowing
Governments should have balanced budgets
48
Describe the perspective of Keynesian economists on economic policy
use Demand-side policies, spending multiplier effect
49
Explain the viewpoint of Monetarist economists regarding output gaps
use Monetary policy to limit output gaps
50
Define capital expenditure
Long-term investment, assets
51
How do Keynesian economists view the impact of spending?
Multiplier effect
52
Define current expenditure
Short-term spending, operational costs
53
Do Keynesian economists support demand-side or supply-side policies?
Demand-side policies
54
What is a direct tax?
tax that goes straight to the government's treasury, usually levied on income or wealth
55
What is an indirect tax?
A tax that goes through a third party before reaching the government, typically levied on spending
56
What is a progressive tax?
A tax where the higher the income, the higher the proportion of income paid in tax (e.g. income tax).
57
What is a regressive tax?
A tax where the proportion paid decreases as the income increases
58
What is a proportional tax?
A tax where everyone pays the same proportion of their income
59
What are the four main reasons for taxation?
- government spending
- To manage aggregate demand
- redistribute income
- correct market failures
60
What is Adam Smith’s first canon of taxation?
Fairness – taxes should be levied according to the individual's ability to pay
61
What is Adam Smith’s second canon of taxation?
Certainty – the timing and amount of tax should be clear
62
What is Adam Smith’s third canon of taxation?
Convenience – taxes should be easy and convenient for taxpayers to pay
63
What is Adam Smith’s fourth canon of taxation?
Efficiency – the cost of collecting the tax should be low relative to the tax revenue generated.
64
What additional features do modern economists argue make a good tax?
1. Minimizes loss of economic efficiency
2. Compatible with foreign tax systems
3. Automatically adjusts to price level changes
65
What does the Laffer Curve suggest?
As tax rates increase, economic activity is discouraged, and tax revenue growth slows or falls.
66
what is a monetary policy
a demand side policy using monetary instruments to influence aggregate demand, supply and macroeconomic indicators
67
monetary instruments
- Rate of interest
- Money supply
-Quantitative easing
- Availability of credit
(controls) and/or borrowing
68
what policies are used when the economy has recovered from a recession and closed its negative output gap and would like to increase its trend rate growth
supply-side policies aimed at increasing the economy's productive potential, thereby raising the trend rate of growth.
69
What is demand management
using fiscal policy to influence
aggregate demand/GDP and macroeconomic objectives
70
what is fiscal trade off
situations where making a choice in one area of fiscal policy, like spending or taxation, necessitates a sacrifice or a change in another area
71
liquidity trap
a situation in which monetary policy becomes ineffective because the short-term interest rate is already near zero, and people and businesses prefer to hold cash rather than spend or invest, even with low borrowing costs
72
When is expanding fiscal policy generally most effective?
During a recession or demand shortfall, when it can stimulate demand and support output and employment
73
Q: Why is expanding fiscal policy useful in a liquidity trap?
Because interest rates are near zero and monetary policy is less effective, so fiscal policy can boost demand
74
Q: What kind of government spending tends to have long-term economic benefits?
Targeted spending on infrastructure, education, or healthcare
75
Q: What risk does fiscal expansion pose when the economy is at full employment?
It can cause overheating and inflation with little gain in real output.
76
Q: What happens when government spending is poorly targeted or inefficient?
The economic benefits are minimal or even negative due to waste and low returns.
77
Q: How can persistent fiscal deficits affect public finances?
They can lead to unsustainable debt, higher interest payments, and reduced investor confidence
78
Q: How can fiscal expansion impact private investment?
It can crowd out private investment by driving up interest rates
79
How might fiscal expansion affect a country’s trade balance and currency?
It can worsen the trade balance and depreciate the currency, potentially leading to financial instability
80
What is the aim of supply-side policies?
Increasing the productive potential and efficiency of the economy.
81
Name two main types of supply-side policies.
Market-based policies and interventionist policies.
82
What are market-based supply-side policies?
Policies that aim to increase efficiency by removing barriers and letting market forces operate freely.
83
What are interventionist supply-side policies?
Policies involving active government intervention to improve economic performance (e.g. investment in infrastructure or education).
84
How can education and training improve supply-side performance?
They increase human capital and productivity.
85
How can reducing income tax rates be a supply-side policy?
It may increase incentives to work and encourage entrepreneurship.
86
How do labour market reforms boost supply-side performance?
They increase flexibility, reduce unemployment, and improve labour mobility.
87
Give an example of a labour market reform.
Reducing trade union power or increasing the retirement age.
88
How can privatisation be a supply-side policy?
It introduces competition, improves efficiency, and reduces government control.
89
How does deregulation improve economic efficiency?
It reduces administrative burdens and encourages competition.
90
Why might infrastructure investment be considered an interventionist supply-side policy?
It improves connectivity and lowers business costs, enhancing productivity.
91
What is the link between supply-side policies and long-run aggregate supply (LRAS)?
Successful supply-side policies shift the LRAS curve to the right, increasing potential output.
92
What is a potential drawback of supply-side policies?
They take a long time to have an effect and can be costly or politically unpopular.
93
How might supply-side policies help reduce inflation?
By increasing productivity and output, which reduces cost-push inflation pressures.
94
How can supply-side policies affect the balance of payments?
They improve competitiveness and export performance, potentially improving the current account.
95
Supply-Side Policies
Government policies aimed at increasing long-run aggregate supply and productive capacity
96
Budget Deficit
When government spending exceeds tax revenue in a given period
97
National Debt
The total accumulated borrowing of the government over time
98
Austerity
Policies aimed at reducing government budget deficits through spending cuts or tax increases
99
Quantitative Easing
A form of monetary policy where the central bank buys financial assets to increase the money supply and encourage lending
