Macroeconomics RWE Flashcards
(23 cards)
Fiscal Policy Benefits
Effective long-run (Great Depression of the 1930s)
Targetable (American Recovery and Reinvestment act 2009 investing nearly $800b into small businesses and households to increase AD)
Good for high MPC (Keynes multiplier) with Lithuania with an average MPC of just over 50%
Fiscal Policy
After the great financial crash of 2008, China invested a massive fiscal stimulus package of 4t yuan (over $500b) making it one of the largest fiscal stimulus packages in the world. It led to rapid recovery to over 9% growth in 2009 whilst also creating jobs through it’s focus on infrastructure allowing for more job stability and so more long-term consumption. However this caused debt to increase by around 25% annually from 2008-2013 raising concerns about financial instability and possible long-term consequences (Lebanon) and also increased inflation to 3.3% (highest since the crash) due to more consumption. Finally housing bubbles formed (increasing prices greatly) and infrastructure greatly benefited the wealthy and so disproportionately benefited the wealthy compared to the poor and so income inequality became large (social instability)
Fiscal Policy Negatives
Debt can cause large impacts on economic growth as the Lebanese financial crash, mainly driven by too much debt, led to a halving of their GDP in 2 yrs from 2019-2021
Bad due to crowding out (Tanzania experienced long-term crowding gout after an increase in government spending from 2004-2008)
Monetary Policy
The Reserve Bank of India (RBI) from 2020-2021 decided to undergo expansionary monetary policy in the form of cutting interest rates 5%-4% from Feb to May of 2020 alongside Quantitative easing. This increased the GDP slightly and decreased unemployment by 2% in those two years which was very effective since this was during the Pandemic. However this could’ve been inequitable as their stock market grew by over 80% in 1 yr but was predominantly benefiting the rich and not the poor (increasing total inequality)
Market-based Supply Side Policies
Australia in 1980-1990 employed expansionary market-based supply side policies through deregulation of the financial institutions (led to economic growth and more competition which increased accessibility for poorer households) and a plethora of tax cuts. This in turn decreased the unemployment from a high of 10% in the 1980s to half that in the late 1990s whilst also decreasing inflation to below 2.5% (opposite of Phillips curve). However this caused significant inequality as the distribution of the deregulation was focused on wealthier individuals (as although poor benefited slightly the wealthy benefited much more) and also caused environmental degradation as more private companies meant a push for economic growth through lower costs and lower prices at the cost of sustainable development
Interventionist Supply-Side policies long example
Singapore launched the SkillsFuture initiative in 2015 aiming to increase the education for those past the standard teaching years (18+). It cost S$1b upfront and kept on costing this amount annually to ensure it is up to date ($750m). Despite this large upfront cost, the benefits were huge. It decrease the NEET (not in employment, education or training) rate from 7.5% to 3.5% (increasing long-term PPC as more skilled workforce) as well as putting in place green courses that increased education on sustainability, causing more sustainable development alongside the economic development through the poverty trap being broken and it being inclusive (giving credits worth S$500 originally to everyone, incentivising education and more skills). This kept their HDI from 11th to 12th (although decreased still incredibly high) and increased the global innovation index from 8th to 5th (2015-2023) showing the economic growth also
Intervention SSP short examples
R+D Tax Credit into it from the HMRC in the UK ; Provision of Infrastructure (China having 4.8% GDP spent on infrastructure)
Unemployment Benefits
Universal Credit or Luxembourgs 87% of pay in the 1st year after being fired from your job allowing their poverty rate to be very high (although there are many other factors) allowing for absolute poverty to be pretty much 0% (although relative poverty is higher due to inflated housing costs due to it attracting many rich people)
Crime Rates
Columbia had the second highest crime rates and unemployment rate of over 60% in 2022 with a 7% crime rate (7% percentage are likely to be a victim of crime in the short future)
Trade Union
All China Federation of Trade Unions (ACFTU) with 300 million member workers as of 2024 (largest in the world) and distributes social benefits, incentivising joining it and allows to protect workers. However it has a lack of independence from the CPP so aims firstly for state stability then for protecting its workers and inefficiency for this reason
Automatic Stabilisers and Discretional Policy
Discretional policy (non automatic or commitment) were used in 2009 after the great financial crisis of 2008 by America (The American Recovery and Reinvestment Act of 2009) spending over $787b (later revised to over $800b). However due to the automatic stabilisers that were put in place, firstly the budget deficit grew which allowed for more austerity measures in the future that went away from economic growth for the sake of reducing debt and the budget deficit. Secondly, there was a lot of redundancy due to the higher unemployment benefits making social and political want for discretional policy low and redundancy as these payments were already going out. Need low automatic stabilisers (low social benefits) in order to allow discretional policy like fiscal policy to be used effectively
Fiscal Drag due to inflation
When inflation occurs meaning peoples wages increase but the tax threshold doesn’t increase so people pay more (their average tax increases) in tax as can be seen in the UK from 2021 when the government decided to freeze nominal tax rates due to wanting inflation to increase the amount of people paying tax at higher thresholds (increasing government revenue) however this decreased disposable income for individuals decreasing demand as well as disincentivizing further people from educating and training to get higher paying jobs due to an even higher chance of paying higher tax. It also increased retirement costs as many have to pay tax when retired which has increased the cost to retire ‘comfortably’ by £2700 in four yrs (nearly £50,000 annually) decreasing inclusivity and economic development and increasing inequality and also regressive as high payers already pay maximum amount but low incomes pay even higher taxes now
Interest Rate v Inflation
If inflation rises then if interest rates are kept the same, the real rate of interest will decrease, disincentivizing saving as people would rather borrow. This decrease in saving can cause economic growth to slow (the Harrod-Domar model) as there is a high MPC as seen by Venezuela’s high inflation rate (130,000%) without equally high interest rates meaning an inflationary spiral existed and hence GDP growth fell by 20% in 2018 (decrease in net exports). Similarly if interest rates rise to combat this problem then borrowing costs will sky rocket (UK in 2025 had an interest rate almost double inflation rate which led to increasing mortgage rates increasing heavily dampening more consumption and hence demand potentially causing a deflationary spiral)
Inflation rate effect on net exports and GDP growth
Lower economic growth due to exports being more expensive for foreign consumers and imports being less expensive for domestic consumers as seen by Venezuela’s hyper inflation in 2018 (reaching 130,000%) led to a decrease in net exports and so GDP decreased by just under 20% in 2018.
CPI v RPI v PPI v Core inflation
September 2023, CPI of 6.7%, RPI of 8.9%, Core CPI of 5.1% showing how each can change quite drastically and so differ inflation expectations and shows how CPI uses a geometric mean whilst RPI (including housing costs like mortgage interest payments and council tax) uses an arithmetic mean making it higher than CPI showing that housing and interest related costs weigh more on households than just consumption of goods and PPI if that’s higher than CPI it tells us that CPI will increase as producers (which it measures the costs to producers - the input costs rather than output costs to consumers) will pass on the higher costs to consumers in time. US in 2021 had a CPI of 2.6% and a PPI of 4.2% and this increased CPI to 5.2% in the next year due to businesses passing on costs
Inflationary Spiral / Deflationary Spiral
Venezuela inflationary spiralling 2018 allowing for ridiculous inflation rates of over 130,000% due to depreciations in the currency making imports expensive (cost-push inflation) which led to wages increasing and money illusion leading to increase in demand then inflationary expectations and currency etc. The government combatted it by letting go of their domestic currency and used the US dollar whilst incorporating austerity measures (increasing taxes) in order to decreased demand and consumption stopping the demand led inflationary spiral / Japan had a deflationary spiral through high interest rates originally which decreased demand which then led to an appreciation due to deflation so imports cheaper so cost-pull deflation and deferred consumption appreciation etc. They tried to stimulate spending by decreasing interest rates, increasing borrowing and overall GDP to counter the constant decreases in demand and deferred consumption and only got out in 2024 when they put their interest rates just above 0% and the fact that they are still struggling with it today shows how there are long-term consequences from one deflationary spiral
Stagflation
In the US in the late 1970s/early 1980s inflation rate peaked over 10% whilst the unemployment rate peaked equally over 8% (countering the Phillips curve and the Keynesian model). The US employed both expansionary fiscal policy aimed to decrease the unemployment rate whilst using contractionary monetary policy - increasing interest rates - to fight the high inflation rate
Gini Coefficients
South Africa highest (worst) at 0.63 whilst Norway has the lowest at 0.227 and tells us that Norway is more equal so more economic development (higher HDI and IHDI)
Poverty Lines
International poverty line (set by the WB) at $2.15/day with adjustments for PPP
National poverty line (Norway) of $37.8/day
Multi-dimensional poverty index
South Sudan have a 91% of their population living in multi-dimensional poverty and this could correlate to their HDI as they have globally one of the lowest HDI’s (0.381) showing it’s use in also measuring economic development due to the multi-dimensional aspect
Country with large amount of their population in the Poverty Trap
Bangladesh due to lack of infrastructure and investment in human capital increasing services (healthcare and education)
Taxation Systems
Progressive taxation systems like Sweden’s system which has a top marginal tax rate of over 50% allows for large tax revenues which can be spent on universal healthcare and education allowing for economic development and low inequality as their HDI is very high at over 0.95 in 2023 / Saudi Arabia have little to no income tax and a low and flat VAT which in essence is regressive as low-income earners will spend more of their income on VAT so their tax burden is higher. Although this decreases tax revenue it also increases foreign investment (many companies are based here) and allows potentially more government tax revenue through corporate taxes as more business appear there even if it’s lower and makes it easier to collect tax revenue as it’s less complex (don’t publish Gini coefficient signalling potential inequality)
Transfer Payments
PROSPERA Program in Mexico (renamed this in 2014) aimed to better the healthcare and education of children and of mothers through nutrition during maternity which not only allowed for intergenerational benefits as more qualified workforce means better for their kids but also the positive externality associated with providing aid to women in need and in families increasing consumption in these households by 10% whilst also increasing enrolment by around 5% (more in rural areas) although there were administrative costs and costs in targeting as some were excluded but also provided a model for other latin American countries to follow in their footsteps creating international change
