Macroeconomic policy Flashcards
STUDY
What is monetary policy?
The policy used to control the flow of money.
What are the insturments used in monetary policy?
Interest rates and quantitative easing.
When may interest rates be used?
To help meet the government target of price stability, or to affect the exchange rate.
What is quantitative easing?
The purchasing of assets to increase money supply.
When may QE be used?
When interest rates are no longer effective for stimulating the economy, however, it has inflationary affects and can lead to depreciation of currency.
What is fiscal policy?
The use of government spending and taxation (and the government budget balance) to simulate and stabilise the economy.
What is expansionary fiscal policy?
When fiscal policy is used to increase AD. This worsens the deficit - may require public sector borrowing to finance.
What is contractionary/deflationary fiscal policy?
When fiscal policy is used to decrease AD.
Fiscal policy may be used to influence AS.
Fiscal policy may be used to influence AS.
The UK government has a large budget deficit.
The UK government has a large budget deficit.
What are direct taxes?
Taxes imposed on income/profits, that are paid directly to the government.
What are indirect taxes?
Taxes imposed on expenditure on goods and services, which increase costs of production. These can be ad valorem or specific.
What is a proportional tax?
A tax with a fixed rate for all tax payers.
What is a progressive tax?
How does this compare with a regressive tax?
A tax in which the average tax rate increases as income increases.
A regressive tax is the opposite.
What are thge limitations of fiscal policy?
Governments may have imperfect information, there is a time-lag, bigger multiplier means bigger effect on AD, high interest rates could cause ineffectiveness.
