Macroeconomic Policies Flashcards
(36 cards)
Define ‘budget surplus’.
When the government’s income is greater than their expenditure
Define ‘budget deficit’.
When the government’s expenditure is greater than their income
What is fiscal policy and what are its two ‘instruments’?
The use of government spending, taxation and no borrowing to achieve macroeconomic objectives
Government spending
Taxes
What are the two types of government expenditure?
Mandatory spending - pensions, unemployment benefits
Discretionary spending - building new schools and infrastructure
What are the two types of taxes used in fiscal policy?
Direct taxes - imposed on individuals and firms
Indirect taxes - placed on spending eg. VAT
State and explain the two types of fiscal policy.
Expansionary - lower taxes and increase government spending to boost the economy and increase AD
Contractionary - increases taxes and lower government spending to slow down the economy and decrease AD
What is the aim and 6 steps of fiscal policy being used to combat inflation?
Aim: Stable prices 1. Too much inflation - AD growing too fast (Boom) 2 Pursue contractionary policies (FP) 3. Taxation↑, Govt. spending↓ 4. Consumer's disposable income↓ 5. C↓, AD↓ 6. Inflationary pressure is reduced
What is the aim and 6 steps of fiscal policy being used to combat a recession?
Aim: Economic growth 1. Recession - low AD (Bottom of the cycle) 2 Pursue expansionary policies (FP) 3. Taxation↓, Govt. spending↑ 4. Consumer's disposable income↑ 5. C↑, AD↑ 6. Economic growth is stimulated
What are the 6 steps of fiscal policy being used to combat a current account deficit?
- Heavy reliance on imports and low exports (M > X)
- Domestic incomes are high
- Pursue contractionary policies (FP)
- Taxes↑
- Disposable income↓
- Less demand for imports - current account deficit reduced
What are the 3 types of taxation?
Progressive - more income you earn, the greater the tax
Proportional - everyone pays the same percentage based on their income
Regressive - everyone pays the same tax regardless of income, affects poor more than wealthy
What are the 3 advantages of fiscal policy?
Government can stimulate/simmer the economy
Can be localised on areas, industries and income groups that need it the most
Government capital spending can increase quality of factors of production in the economy
What are the 3 disadvantages of fiscal policy?
Time lags/time gaining approval and effect
Conflicts with other macroeconomic objectives
Can have impacts on the government budget/national debt
What 5 factors are used to evaluate fiscal policy?
Size of income tax cut - detrimental to standards of living?
Type of tax rise/cut - regressive?
Impact on budget deficit - capacity to spend?
Focus on particular region - benefits everyone?
Consumer confidence - people likely to spend or save?
Define ‘base rate’.
The minimum interest rate commercial banks are permitted to lend at
Define ‘interest rates’.
The price of borrowing and the reward for saving
What is the effect of the base rate on commercial banks’ interest rates?
Base rate ↓, IR ↓
Base rate ↑, IR ↑
What are the 2 effects of increased interest rates on the economy?
Consumers - incentivised to save, less likely to borrow
Firms - reluctant to invest
What are the 6 steps of quantitative easing?
- Electronically created money for Bank of England
- Central Bank buys back government bonds from commercial banks, pension funds and insurance firms
- Central Bank gives firms more cash to spend
- Investment into small firms encouraged - injection into circular flow
- Greater investment (I↑) and consumption (C↑)
- AD↑
What are the 6 steps of monetary policy being used to combat inflation?
1) Too much inflation
2) Pursue contractionary policies (MP)
3) Interest rates ↑, Quantitative easing ↓
4) C↓, I↓
5) (X - M)↓, AD↓
6) Inflation is reduced
What are the 6 steps of monetary policy being used to combat a current account deficit?
1) Economy struggling with current account deficit
2) Pursue contractionary policies (MP)
3) IR↑, QE ↓ - attractive to save
4) M↓
5) (X - M)↑, AD↑
6) Current account deficit is reduced
What are the 6 steps of monetary policy being used to combat high unemployment?
1) Too much unemployment
2) Pursue expansionary policies (MP)
3) Interest rates ↓, Quantitative easing ↑
4) More attractive to borrow, less attractive to save
5) C↑, I↑, (X - M)↑, AD↑
6) Unemployment is reduced
What are the 6 steps of monetary policy being used to combat low economic growth?
1) Economic growth is slow
2) Pursue expansionary policies (MP)
3) Interest rates ↓, Quantitative easing ↑
4) C↑, I↑, (X - M)↑
5) AD↑, GDP↑
6) Economic growth increases
What are the 3 advantages of monetary policy?
Direct and powerful effect on household spending
Interest rates can be adjusted quickly and frequently
Arguably quicker than fiscal policy
What are the 4 disadvantages of monetary policy?
Policy trade-offs - trying to achieve one policy will lead to another being unsatisfied
Some time lags in it taking effect
Low interest rates in a deep recession may not work - people lack confidence to spend
Quantitative easing difficult to control - interest rates preferred
