Section 3 - policies Flashcards
(39 cards)
What is fiscal policy?
Governments decisions about spending and taxation
what is the difference between gov spending and revenue known as
budget surplus
what are the two types of deposit made by banks?
- Retail deposits - made at branches of banks and building societies
- Wholesale deposits - much larger (one-off) deposits made by a company and probably involve negotiations over the rate of interest earned
what is the money multiplier?
The relationship between the different definitions of money and changes in the monetary base
what are the three main motives for holding money?
1) transactions motive;
2) Precautionary motive (ie. the need to met unforeseen events requiring money)
3) Portfolio or asset motive, where money is simply another financial asset with no (or low) risk and low return
What are the 4 types of unemployment?
- Frictional
- Structural
- Classical
- Keynesian
What is Frictional unemployment?
• Frictional – refers to individuals between jobs, or who are not easily employable because of physical or similar problems. (usually ignored by economists)
What is Structural unemployment?
• Structural – refers to changes in unemployment due to changes in demand or production patterns over time. Such changes may require a would-be employee to retrain, relocate etc.
What is Classical unemployment?
• Classical – exists because there is too high a level of the real wage, so the labour market is not fully adjusted.
What is Keynesian unemployment?
• Keynesian – refers to a demand deficiency brough about by the lack of flexibility of wages and prices required to restore classical full employment.
how is unemployment defined / measured in the UK?
the number of people registered as available for work divided by the total UK labour fource
How is inflation measured in the UK
CPI - consumer prices index / CPIH which also seeks to measure housing costs of owner-occupiers
What is inflation?
Inflation is a decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services in an economy.
what is deflation
reduction of the general level of prices in an economy.
what are main causes of inflation?
Demand-pull inflation – aggregate demand growing faster than aggregate supply (growth too rapid)
Cost-push inflation – For example, higher oil prices feeding through into higher costs.
Devaluation – increasing cost of imported goods, and also the boost to domestic demand.
Rising wages – higher wages increase firms costs and increase consumers’ disposable income to spend more.
Expectations of inflation – causes workers to demand wage increases and firms to push up prices.
What is Demand pull inflation?
If the economy is at or close to full employment, then an increase in aggregate demand (AD) leads to an increase in the price level (PL). As firms reach full capacity, they respond by putting up prices leading to inflation. Also, near full employment with labour shortages, workers can get higher wages which increase their spending power
What is cost push inflation?
If there is an increase in the costs of firms, then businesses will pass this on to consumers. There will be a shift to the left in the AS.
what is the European central bank’s target for inflation?
seeks to keep eurozone inflation below but close to 2%, whilst also supporting the economic policies of the EU member states - conducting foreign exchange operations and promoting smooth operation of the banking payment system
what is the US federal reserve approach to inflation
Uses open market operations, discount rates and reserve requirements to influence the federal fund rate for long-term price stability and sustainable economic growth
what is the approach of the Japanese central bank?
central bank law states that monetary policy should contribute to the sound development of that national economy through price stability
what is quantitative easing
Occurs in times of financial crisis.
On the basis that interest rates cannot be reduced further to stimulate the economy through increased credit demand the central bank purchases financial assets, including government and corporate bonds, from financial institutions using electronic money.
This has the effect of raising prices of securities thereby lowering market interest rates for these securities and exchanging cash balances for these securities on the balance sheets of the selling institutions.
These institutions e.g. banks will therefore be adding to their cash reserves and thus create new lending. Institutions eg. pension funds will find themselves with excess cash and are supposedly more likely to buy new primary securities issued by corporations with investment needs
what is debated around quant easing
debated as to whether it can lower market rates beyond the short term
what are issues with quant easing
- been described as printing money
- has some historic association with subsequent high inflation
what is forward guidance
a central bank commits to keeping interest rates at a certain level into the future. Often to a specific date of until some key policy variable such as unemployment reaches a desired level
The intention is to give economic agents some certainty about the future path of borrowing costs
