topic 15 - theme 2 Flashcards
macroeconomic policy objectives (23 cards)
what are the 5 main policy objectives?
- economic growth
- low unemployment
- low and stable rate of inflation
- fair distribution of income and wealth
- satisfactory balance of payments current account
what are the 2 extra main policy objectives?
- protection of environment
- balanced budget
what is the ultimate aim of society?
to improve the wellbeing of its citizens
what is demand-pull inflation?
inflation initiated by an increase in aggregate demand
what is cost-push inflation?
inflation initiated by increase in costs of production at an aggregate level
- e.g. an increase in wage costs
what is the money supply?
the quantity of money in an economy
what are the costs of inflation?
- causes uncertainty and lowers investment
- high inflation leads to lower growth and stability
- menu costs
- shoe leather costs
- erosion of savings
what are the pros of inflation?
- moderate inflation enables economic growth
- moderate inflation allows adjustment of real wages
- moderate inflation allows adjustment of prices
- inflation is better deflation as deflation can cause a recession
what is the budget?
proposed spending for the next 12 months by the government
- takes into account revenue and expenditure
what is a budget deficit?
when the government proposes to spend more than what’s coming in
what does an expansionary policy aim to do?
aims to stimulate economic growth and increase AD by lowering interest rates therefore there is an increase in the money supply and encourages borrowing and investing
what is one method of increasing the money supply?
quantitative easing - increasing the money supply by electronically creating money
1. use money to buy bonds
2. decrease interest rates on bonds
what does a contractionary policy aim to do?
aims to slow down the economy and control inflation by raising interest rates therefore reducing the money supply and discouraging borrowing and spending
how do we measure income inequality?
using the Gini coefficient
what is the Gini coefficient?
measure the inequality in the distribution of household income
- the higher the value the more income inequality
why is inequality a problem?
- poverty
- harms incentives/entrepreneurial spirit
why do we need a degree of income inequality?
- we need people to do all types of jobs - including those that pay low income
what does economic/income inequality mean?
the unequal distribution of income and opportunity between different groups in society
what are the causes of income inequality?
- family background
- ethnicity
- gender
- age
- education
what is the Philips curve?
an empirical relationship suggesting that there is a trade-off between unemployment and inflation
what does the Philips curve show?
- high inflation = low unemployment
- high unemployment = low inflation
why does the Philips curve go below the line (0)?
due to deflation
what does stagflation mean?
a situation describing an economy in which both unemployment and inflation are high at the same time
