Unit 9 Flashcards
(36 cards)
What is monetary policy?
Central bank taking action to influence manipulation of interest rates, supply of money, exchange rate and credit to influence economic activity.
Who sets the objectives for monetary policy?
Government
What is the main target of monetary policy?
Low inflation
How does the monetary policy work?
Monthly meetings via the MP.
They consider many macroeconomic variables.
Main disposal is interest rates (also quantitative easing)
Why is target inflation important?
Gives confidence to:
Consumers
Firms
Worker
What is the MPC?
Monetary Policy Committee
9 Members (4 independent, 5 from within bank)
Chaired by Mark Carney
Independent from government
What are interest rates?
Price of money
Cost of borrowing and reward of saving
What is the link between interest and exchange rates?
Global investors want to invest their money in a country with the highest interest rates.
If UK raises this, investors will move more money into the UK, this means they will sell their money for pounds.
This increased demand for pounds increases the exchange rate.
This makes exports less attractive and imports more attractive, therefore worsening the current account
How does the money supply affect monetary policy?
If BoE increases the supply of notes and coins in the economy this should incentivise spending.
However, too much supply reduces the value and creates inflationary pressure
How does rules on bank lending and credit agreement affect monetary policy?
If BoE tightens rules on credit/loans available, this would have an effect of constraining investment and consumption.
How does monetary policy affect AD?
Consumption:
- Low interest rates = less incentive to save so higher consumption
Investment:
- Low interest rates = investment rises as it’s less costly
Net Exports:
- Low interest rates = weak £ as less attractive to currency investors
- Weak £ = more exports, less imports
Monetary Policy impacts?
Wealth Effect:
- Falling interest rates means greater demand for housing through affordable mortgages and increases property prices.
Savings Ratio:
- High interest rates = higher savings ratio as more income is likely to be saved and less consumed.
What affects monetary policy effectiveness?
- Size of change
- Timing of rate changes
- Size of multiplier
- Stage of economic cycle
- Time
What is fiscal policy?
The manipulation of government spending, taxation and government borrowing to influence economic activity
What objectives does fiscal policy achieve?
- Inflation of 2%
- Stimulate economic growth/employment
- Maintain economic cycle
What is expansionary fiscal policy?
If government is trying to positively stimulate economic activity.
Cutting taxes
Raising government spending
Increasing budget deficit
What is contractionary fiscal policy?
Constrain aggregate demand, reduce debt or control inflation.
Increasing taxes
Cutting government spending
Cutting budget deficit
What are the different types of expenditure?
Current expenditure: short term spending on day to day running of the country
Capital expenditure: long term spending on assets e.g hospitals, schools
Transfer payments: a redistribution of income for which no good/service is provided for in return
What is public expenditure?
Government spending to pay for the needs of society such as health, education and infrastructure
What are the different government party views on public expenditure?
Left leaning: increase public spending to look after the needs of society
Right leaning: reduce public spending and believe markets should be left to fend for themselves
What is direct tax?
Is imposed on the income of individuals or profits of a business, it is paid directly to the government.
What are types of direct tax?
Income
Corporation
Inheritance
National Insurance
What is indirect tax?
Imposed on goods/services
This impacts the price of them
What are types of indirect tax?
Value Added Tax
Excise Duty
Customs Duty
