Topic 4 - Macroeconomic Policy Flashcards
What is meant by Monetary Policy?
Involves change in interest rates, the supply of money + credit, and exchange rates to influence the economy
What is meant by core inflation?
Excludes price of energy, food, alcohol and tobacco
What are the 2 types of interest rates in an economy?
Interest rates on savings in bank and other accounts
Borrowing interest rates
- Mortgage interest rates
- Credit card interest rates
- Interest rates on government and corporate bonds
BOE uses policy interest rates to help regulate the economy
What is meant by expansionary monetary policy?
Falls in nominal and real interest rates
Measures to expand supply of credit
Depreciation of exchange rate
What is meant by a deflationary monetary policy?
Higher interest rates on loans and savings
Tightening of credit supply
Appreciation of exchange rates
What is the real rate of return on savings?
Money rate of interest - rate of inflation
When do real interest rates become negative?
When the nominal rate of interest is below inflation
What are the factors considered when setting policy interest rates?
GDP growth and spare capacity/ estimates of output gap
Bank lending, consumer credit figures, retail sales
Equity markets and house prices
Consumer / Business confidence
Growth of wages, average earnings, labour productivity, and unit labour costs
Unemployment and employment data
Trends in global foreign exchange markets
International data
What is meant by the transmission mechanism of monetary policy?
Change in market interest rates - Normally a change in policy interest rates feeds through to the borrowing / saving rates
How does the transmission mechanism impact demand?
Effects spending, saving, investment and exports
How does the transmission mechanism effect on output?
No definite expansion of production and employment
What is meant by fiscal policy?
Involves the use of government spending, direct and indirect taxation, and government borrowing to affect the level and growth of aggregate demand, output and jobs
Why is fiscal policy used?
It is used to change the pattern of spending on goods and services
means by which a redistribution of income and wealth can be achieved
An instrument of microeconomic government intervention to correct for market failures
Difference between public and private sector businesses?
Public - Government owned and operated
Private - Privately owned - more profit driven
Key roles for Fiscal Policy
Decisions have an impact on millions of consumers and businesses - in both the short term and long term
- Financing Gov spending
Changing final income and wealth
Providing a welfare state
Managing the economic cycle
Improving long run competitiveness
Tackle important market failures
