Macroeconomic Policy Flashcards
(24 cards)
What is Monetary Policy?
Monetary policy is used to control the money flow of the economy. This is done with interest rates and quantitative easing. This is conducted by the Bank of England, which is
independent from the government.
How do interest rates affect the economy?
High interest rates discourage borrowing and spending, while low interest rates encourage borrowing and investment, affecting inflation and economic growth.
How does a weaker exchange rate affect the economy?
A weaker exchange rate makes exports cheaper and imports more expensive, potentially improving the current account but causing cost-push inflation.
What is fiscal policy and what are its key instruments?
Fiscal policy involves manipulating government spending, taxation, and the budget balance to influence the economy.
How does government spending influence aggregate demand (AD)?
Increasing government spending boosts AD, while cutting spending reduces AD. Expansionary fiscal policy increases spending, while deflationary policy reduces it.
How do taxes influence AD?
Lowering taxes increases disposable income, encouraging spending (expansionary). Raising taxes reduces disposable income, decreasing spending (deflationary).
How can fiscal policy influence aggregate supply (AS)?
Lowering income and corporation taxes can encourage investment and spending. Government spending on education, training, and infrastructure can improve productivity, shifting AS right.
What is the difference between a government budget deficit and surplus?
A deficit occurs when government spending exceeds tax receipts, while a surplus happens when tax receipts exceed spending.
What is the difference between government debt and the government deficit?
The debt is the accumulation of past deficits, representing the total amount the government owes. The deficit is the annual difference between government spending and tax receipts.
What are direct taxes and provide examples?
Direct taxes are imposed on income and paid directly by taxpayers. Examples include income tax, corporation tax, and inheritance tax.
What are indirect taxes and how do they affect prices?
Indirect taxes are levied on goods and services. They increase production costs, raising prices, which can reduce demand. Examples include VAT and fuel duties.
What is a proportional tax?
A proportional tax is a fixed rate for all taxpayers, regardless of income. For example, everyone might pay 20% income tax.
What is a progressive tax?
A progressive tax increases as income rises. Higher-income earners pay a larger proportion of their income in tax. For example, UK income tax is progressive with different bands for different income levels.
What is a regressive tax?
A regressive tax takes a larger percentage of income from lower-income individuals. Examples include the London Congestion Charge and Council Taxes, which disproportionately impact lower-income earners.
What are the limitations of fiscal policy?
Limitations include imperfect information, long time lags, the risk of crowding out private sector investment, and high debt leading to future borrowing difficulties.
What is the aim of supply-side policies?
To increase the economy’s long-run productive potential by improving efficiency, productivity, and labour market flexibility.
How can governments increase incentives through supply-side policy?
By reducing income and corporation tax to encourage work, saving, and investment.
How do supply-side policies promote competition?
Through deregulation, privatisation, and stronger competition policy to reduce monopoly power and improve efficiency.
How can the labour market be reformed with supply-side policies?
By reducing the National Minimum Wage, weakening trade unions, and improving labour mobility (e.g. relocation subsidies, job vacancy information).
How can supply-side policies improve the quality of the labour force?
By increasing government spending on education, training, and healthcare to enhance worker productivity.
What is the role of infrastructure in supply-side policy?
Investing in infrastructure (e.g. roads, schools) reduces costs for firms and supports long-run economic growth
What type of unemployment do supply-side policies target?
Structural unemployment — by improving skills, mobility, and matching in the labour market.
What are the limitations of supply-side policies?).
They have long time lags and can worsen income inequality (e.g. from tax cuts or reduced union power).
How do supply-side policies differ from demand-side policies in dealing with unemployment?
Supply-side policies address structural unemployment, while demand-side policies are better for cyclical unemployment by boosting AD.
