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Resits > Macroeconomic Policy Instruments > Flashcards

Macroeconomic Policy Instruments Flashcards

1
Q

Fiscal Policy

A

Demand-side policy - Taxation & Gov SpendingUsually used to influence AD (=macroeco effect)/smooth out fluctuatoions in eco cycleBoost demand in recession to stim eco growth/reduce unemploymentReduce demand during boom - control inflation/avoid inflation

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2
Q

Eco cycle graph

A

draw graph

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3
Q

How can fiscal policy be used to increase AD

A

Reflationary fiscal policyIncrease gov spendingIncr. welfare payment = more disposable incomesBuilding new infra e.g. schools/hosps = more jobs/higher incs = more disp incomesLowering taxesDecreasing inc tax = more disposable inc to spendDecr. indirect taxes e.g. VAT = less exp goods so buy moreLess withdrawals/grter injections from CFofI

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4
Q

How can fiscal policy be used to increase AD

A

Reflationary fiscal policyIncrease gov spendingIncr. welfare payment = more disposable incomesBuilding new infra e.g. schools/hosps = more jobs/higher incs = more disp incomesLowering taxesDecreasing inc tax = more disposable inc to spendDecr. indirect taxes e.g. VAT = less exp goods so buy moreLess withdrawals/grter injections into CFofI Shifts AD to rightNew equ = higher price level = demand-pull inf incr’dOutput increased = unemployment decreased + eco growth

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5
Q

How can fiscal policy be used to increase ADPoint 1 (3)Point 2 (3)Effect (4+1)Decrease AD = same/opposite

A

Reflationary fiscal policyIncrease gov spendingIncr. welfare payment = more disposable incomesBuilding new infra e.g. schools/hosps = more jobs/higher incs = more disp incomesLowering taxesDecreasing inc tax = more disposable inc to spendDecr. indirect taxes e.g. VAT = less exp goods so buy moreLess withdrawals/grter injections into CFofI Shifts AD to rightNew equ = higher price level = demand-pull inf incr’dOutput increased = unemployment decreased + eco growth Negative output gap reduced

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6
Q

Changes in AD affect…

A

Current account of Balance of PaymentsHigher incomes = more spent on imports = more money leaves CFofI

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7
Q

Changes in AD affect…

A

Current account of Balance of PaymentsHigher incomes = more spent on imports = more money leaves CFofI

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8
Q

Fiscal policy - complications (2)

A

Gov spending = takes long time to org; state of eco could change before any gov action is takenGov has imperfect info about eco (missing/wrong) = could do wrong thing because theyre making decisions based on inacc info

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9
Q

Effects/Impact of Increasing AD depend on…

A

Current state of the economy Expansionary fiscal policy can help reflate eco/increase output but inflation…- Depends on current conds

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10
Q

Effects/Impact of Increasing AD depend on…Effects…*? + Expl?

A

Current state of the economy Expansionary fiscal policy can help reflate eco/increase output but inflation…*How much of these 2 things you get depends on how much spare capacity in ecoLots of spare capacity/unused machines&workers = can easily increase supply so little demand-pull inflation But if eco’s working close to full capacity/few spare workers = prices forced up because supply can’t keep up w demand

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11
Q

Another problem with fiscal policy

A

Stop-go cyclesGov could use fiscal to boost eco in recession but by then eco could overshoot/cause high inflation before gov can change its policy Gov may ‘apply the brake’ to eco with defl. fiscal = another recession

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12
Q

Another problem with fiscal policy (3)

A

Stop-go cyclesGov could use fiscal to boost eco in recession but by then eco could overshoot/cause high inflation before gov can change its policy Gov may ‘apply the brake’ to eco with defl. fiscal = another recession

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13
Q

Another problem with fiscal policy (3)

A

Stop-go cyclesGov could use fiscal to boost eco in recession but by then eco could overshoot/cause high inflation before gov can change its policy Gov may ‘apply the brake’ to eco with defl. fiscal = another recession

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14
Q

What can affect tax cuts/fiscal policy being used to solve recession (4)

A

ConfidenceIf people feel confident about eco future/not worrying about job, then consumer tax cuts/xtra disp inc = likely to increase consumption=eco growthNot confd = save rather than spend + Firms invest more/incr. productive potential of eco If confd otherwise delay/save money

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15
Q

What can affect tax cuts/fiscal policy being used to solve recession (4)

A

ConfidenceIf people feel confident about eco future/not worrying about job, then consumer tax cuts/xtra disp inc = likely to increase consumption=eco growthNot confd = save rather than spend + Firms invest more/incr. productive potential of eco If confd otherwise delay/save money=leakage

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16
Q

Effects of too much gov spending (increase in IR)

A

Crowding out = gov spending replaces priv sector spending

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17
Q

Crowding out? (2)

A

May use resources that priv sector could have otherwise employed = may be no overall incr in ADTo pay for more spending, gov may need to increase IR to encg people to lend more money => discg firms from borrowing = gov investment crowds out priv sector invstm

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18
Q

Trad Keynsian approach

A

Smoothing out eco cycleCan lead to var trade-offsIncrease in AD = higher inflation More jobs/higher incs -> b of payments probs

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19
Q

Fiscal Policy - diff approach/nowadays…(4)

A

Ag supplyMicroecoSpecific regionProg taxation

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20
Q

Nowadays - how is fiscal policy used to help gov achieve their objs?Aim?Adv?Example?

A

Influence AS/supply-side fiscal policyIncr prod potential of eco to create long-term eco growthDoesn’t cause inflation & improve current account on b of paymOffering tax-cuts to entrep to encg to start up new bus to incr prod potential

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21
Q

Fiscal policy - microeco levelE.G (3)

A

To try to influ how indv consumers/firms behaveDemerit goods/alcohol - can be taxesMerit - subsidised to incr consmpCan help gov achieve env policy e.g. ‘green taxes’ to discg coal/oil//subsidies to renewable energy firms

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22
Q

Fiscal policy - specific regs?

A

Directed at specific regions needing help e.g. if reg loses big employer, gov could invest in that region to create jobs

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23
Q

Fisc policy - tax

A

Progressive taxation = takes larger amount of tax from p on higher incs = allows gov redistrb wealth from those better off to those less well off (benefits)

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24
Q

Monetary policy - type of policy

A

Demand side policy

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25
Q

Monetary policy:

A

Controlling amount of money in economy/money supply (notes/coins/bank accounts/loans) & how expv it is to borrow

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26
Q

3 components of monetary policy…Involves manip’ing

A

Interest ratesExchange rateMoney supply to affect AD

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27
Q

Changes to IR affect (4)

A

Borrowing/spending/saving/investment

28
Q

Link between 3 components of monetary policy?

A

Change in IR affects money supply & exchange rate e.g. high IR = restricts money supply - lower demand for loans + exchange rate stronger - incr demand for currency to take advg

29
Q

Types of monetary policy

A

Cont -> reduce ADExps -> incr AD

30
Q

Contractionary monetary policy?How? (3)

A

Reduce ADHigh IRRestrictions on money supplyStrong exchg rate

31
Q

Graph for contr monetary policyExpl (4)

A

check rev guideAD shifts leftPrices fallOutput falls=> higher unemployment + slowdown in eco growth

32
Q

Exps monetary policy

A

Lower IRLess restrictions on money supplyWeak exchg rate

33
Q

Interest rates set byUsed toCurrent target

A

Monetary Policy Commitee (MPC) of Bank of Eng IR used to control inflation - meet targ set by gov’s macro polc obj of low inflation/stable prices2% CPI

34
Q

Effects of increasing IR (4)

A

Cost of borrowing money - up = ppl/firms less likely to borrowP with mortg/overdraft/credit card= higher repayments = less left to spend/consmp goes down (=AD down)Investment by firms goes down - most investments = using borrowed money (=AD goes down)Savers = bigger return on saving so people likely to save more

35
Q

Higher IR - effect

A

Worsens bal of payments on current account

36
Q

High IR - effect*(4)

A

Large banks want to buy £s/ take advg of high rewards for savers *short term movement of money = hot moneyMore demand = price goes up//£ value/exchg rate risesHigh exchg rate = UK exports more expensive for othersExports goes down = worsens b of paym Imports, chepaer for UK = worsens current account = leakage/AD reduction

37
Q

Low IR(6)

A

Improves b of p/current accountLow IR = put hot money somewhere else to get better reward from high IR= lowers demand for £ + exchg rate falls (cheaper to buy pounds)= exports go up/imports down = AD upImprovement in current account of bofp

38
Q

Effectiveness of monetary policy - evaluationMPC had to consider … when making eco decisions?

A

Output gapsNeg output gap/lots of spare capacity = inflation less likely to increase - so MPC can decrease IR

39
Q

IR & spare capacity (3)

A

Firms might delib not be working at full capacity - having diffcs selling goods (=stockroom full) => unlikely to put prices upDuring recession/recovery, MPC could use exp. monetary pol. - keep IR low to encg growth/employmentBut no spare capacity (demand>supply/posv. output gap) = upward pressure on inflation so MPC incr IR

40
Q

MPC changing IR effects

A

Knock-on effects which conflict with gov objvs (tackling inflation but eco growth/unemply??)

41
Q

Low IR - spending & investment exceptions (2)

A

Low IR = cheaper for consms to spend/firms to inv but depends on CONF- even when IR’s low, recession = uncertain about future so could still choose to save (despite low rewards)Firms only invest if confd about future income - few orders/lots of surplus stock - won’t spend more money

42
Q

High IR leads to/prob

A

UnfairnessHigh IR = more money to those with money already/take away from those that have borrowed => widens gap betw rich/poor

43
Q

IR - effect? (3)

A

Takes time to affect people’s behaviour - firms plan investment projs v carefully (months/yrs before money’s spent)House-buying takes time Fixed-rate mortg holders = don’t notice IR change until fixed-rate period ends

44
Q

IR = unexpected effects (3/5)

A

High IR = £ value rises -> GB goods, more expv overseas = firms will buy usual GB goods from elsewhere but takes time to find altv prods + contracts(yrs)…= could still buy GB goods= some goods price inelastic so value of exports may fall by less/rise+ if high inflation in other country importing UK goods then those UK imps = might still be compt’vely priced despite out exchg rate risingWhen £ = strong/high exchg rate, imports cheaper; normally bad/leakage but good for UK firms that import lots of raw mats/ costs reduced + lower prices for consumers (dom+abroad)

45
Q

Rising IR doesnt always reduce inflationUsually?(3)

A

Higher IR reduces demand-pull inflationBut if demand already q low then increasing IR = not much/exp effectFirms may raise prices if they have to pay more interest on loads = cost push inflationHigher prices may cause workers to demand higher wages - leading to wage-price spiral pushing prices up higher = inflation worse

46
Q

Supply-side policies

A

Shift AS curve to right/increase how much firms willing to supply at each £

47
Q

Types of s-s policies (3)

A

increasing productive capacity of eco by incr quant/qual of FOPs e.g making it more diffc to claim JSA = more ppl workincrease prod’vity of firms/employees e.g. training/education = more skilled/effective = incr’d labour prod’vitygovs can s-s policy to change personal incentives e.g. reduction in inc tax could encg workers to work longer/harder for promotion

48
Q

Supply-side policies

A

PrivatisationDeregFlexibility of labour market

49
Q

*s-s can make workers more efficient/competitiveDefinitionsExamples

A

Privatisation & DeregulationPrivatisation = when firm/industry changes from being run by public sector/gov to private - priv.sect more efficient/less wasteful than pub.secDereg = getting rid of rules imposed by gov that restrict level of competition in market e.g stopping priv firms entering market which contains only state-owned monop/reduce ‘red tape’..planning permiss- more comp/efficient in market = prod’vity should incr

50
Q

Increasing flex of labour markets (3)

A

Reduce power of trade unions used to be maj s-s polcstrong unions can neg higher wages/incr firm’s cost + make harder for firm to lay off workersless union power = more flexb workforce (short-term flex contracts) - can hire&fire accd to current demand of buesiness

51
Q

s-s powerful effects (4) examples

A

medium-long-term e.g. education policies, benefitstend to be microeco - affect way indv/consm’s behave e.g. encg firm to train workforce diff’ly but usually s-s like privatisation work on macroeco levelimproving s-s = not just by gov; businesses can take initiative/improve themselves by inv in new machinery/extra staff trainingfree market = in firm’s own interest to improve prod’vity/comptv’ness e.g. s-s polc’s by firm could incr comptvness/qual of its prods.exports could rise = current account improves on bofp

52
Q

why s-s rather than demand-side

A

help grow eco without inflation

53
Q

effects of s-s - graph(3)

A

shift as curve right= eco producing more/national output incr’d = eco growth/jobsbut price levels fallen = no inflation

54
Q

supply-side fiscal policies (more pop than fiscal polc) (4)

A

tax/benefit cuts = incentives for individual eco agents (consumers/firms) to act in way to help eco/not just affect ADincome tax cuts = incentive to work hard/not directly incr disposable increduction in business taxes = incentive for entrep to take risks/invest more = succ compsreduction in welfare befs = incentive to work than stay on benfts

55
Q

supply side fiscal policieseffect + overall effect?

A

higher tax receipts:more people in work = less gov welfare benefitspeople working longer = more inc tax overallbusiness, more successful = more profits to tax=> should reduce budget deficit/incr budget surplus

56
Q

main advantage of s-s policies

A

fewer trade-offs between eco objs

57
Q

s-s polc graph

A

price same - supply kept up with demand + no demand-pull inflation+ firms more prod/efficient, low risk of cost push inflation

58
Q

s-s advgs (2)

A

doesnt lead to incr in national debteco less dependent on imports

59
Q

s-s - national debt (5)

A

no increaseexps fiscal/monetary polcs = budget deficits (more gov. spending than tax)but many s-s polcs - implt’d by private sector + incr’d tax receipts = helps decr any budget deficits= less risk of ‘crowded out’ - gov doesn’t have to borrow heavily to pay for its spending

60
Q

s-s - imports (3/4)

A

eco less dep on importsif eco can produce high qual g/s at low prices then less imports boughtkeeping exports competitive = vital for future growth. foreign export markets = becoming more & more important for UK firms (ecos of China/Ind = growing quickly/demand incr’ing)

61
Q

s-s prob/circum (2)however?

A

polc’s dont work without sufficient AD = during recession/weak demand, s-s not apprrptake time to work/->recession may need more immd help so demand-side = more immd effectbut s-s = eco more resilient/better able to cope with shocks e.g. more flexb workforce in recession helps

62
Q

downsides to s-s policies (3)

A

not all benefitwidens gap betw rich/poor - rich=incentives to make money & poor on welfare benfs=thrtned with more povfavour employers over employees - weakening trade unions=good for employers e.g. less press to raise wages. + without fear of union action, can treat workers unfairly, hire&fire => favours employers - recruit more easily/cheap **but firms m likely to take on workers during good times at least

63
Q

downside to s-s policies - example(3)

A

market-oriented = competition in free market will provd most efficient outcomes overall e.g removing nat min wage = improve labour flexb ==>shifts AS curve to right = policy workedBut some would be paid less than without min wage = not all benefit…

64
Q

Fiscal policy + monetary policy - conflict (2)

A

refl fiscal to incr AD = gov has to borrow money (can issue treasury bill) = extra £s spent by gov could risk inflation=> MPC -> contrc monetary polc = slows down eco+ crowd out investment by private sector = decrease prod potential of eco

65
Q

Fiscal polc + supply side conflict

A

refl fiscal polc to incr AD = spend money on health/educextra spending = inflation in short term but long-term - improvement in ASBut defl fiscal (spend less on health/ed = shift AS left = higher prices/infl) to reduce infl = conflict between fiscal/s-s

66
Q

monetary + comptvness

A

…

Resits (5 decks)

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