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WEEK 19 Flashcards

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1
Q

Fiscal policy

A

Adjusting govermenet expenditure and taxation to influence aggregate demand

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2
Q

Problem of fiscal policy

A

Problem of magnitude - we have an inflation and gov wants to red the AD for tnat they want to use it and reduce gov spending or increase taxes, by how much they need to reduce the gov spending in order to reduce AD

If we want increase gov spending they focus on making new school tjat are better

Better school will motivate people to move to

Problem with timing

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3
Q

Expansionary fiscal policy

A

Increase govern spending (increase injection)

Decrease taxes (reduces withdrawals)

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4
Q

Increase in government spending

A

Increase in net saving

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5
Q

Deflationary : contractionary fiscal policy

A

Reduces spending (reduces injections )

Increase taxes (increase withdrawal)

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6
Q

Temporary

A

People are gonna save more

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7
Q

Prediction of effect of tax

A

Tax cuts increase disposable income but
- some is spent some is saved
-depends on whether cut is perceived as temporary or permanent
-influenced by consumer confidence and financial health

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8
Q

What is Taylor rule

A

Simple inflation targets can be problematic in practice

-inflation
-real national income or unemployment

It aims to balance economic stability across both inflation and output/uneployement

Weight given to each objective can be decided by the government or central bank

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9
Q

Interesr rates are adjusted when

A

Inflation deviates from its target

Economic growth or unemployment deviates from sustainable levels

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10
Q

Fiscal policy involves long time lags

A

Delays in problem recognition

Delay in implementation (budget cycle)

Delay in impact via multiplier/ accelator

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11
Q

Risk of destabilisation

A

Expansionary policy may hit when economy is already booming -> overheating

Deflationary policy may hit when recession has started -> deeper downturn

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12
Q

Random shocks

A

Unpredictable events 9/11 2008 financial cities can u see mine fiscal plans

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13
Q

Predicting effect of change in goverment expenditure

A

Total injection may rise less than planned

-public spending may replayed private spending (NhSvs private healthcare)

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14
Q

Crowding out effect

A

Government borrowing competes with private sector
Leads to higher interest rates
Discourages private investment and consumption
In extreme cases: increase in government spending may be fully offset

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15
Q

Cyclical adjustments

A

Removes cyclical effects from deficit/surplus

Shows impact of government policy(fiscal stance)

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16
Q

Fiscal stance

A

Refers to expansionary or contractions intent of fiscal policy

A deficit doesn’t necessary mean expansionary - a surplus doesn’t mean contractionary

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17
Q

Key indication change in deficit /surplus over time

A

Falling deficit- aggregate demand falling (likely contractionary)

Rising deficit - aggregate demand rising (likely expansionary)

Size of deficit/surplus is a poor standalone indicator of fiscal stance

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18
Q

Impact of economic cycle

A

Booming economy

Depressed economy

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19
Q

Booming economy

A

Hugh tax revenue

Low uneployemet -> low benefits spending

reduces deficit /increase surplus

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20
Q

Depressed economy

A

Low tax revenue

Hugh unemployment-> high benefits

Increase deficit/ reduces surplus

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21
Q

Larger deficit

A

Faster debt accumulated

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22
Q

Predicting tbe multiplier effect

A

a small increase in injection will increase the GDP and the aggregate demand even more

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23
Q

Monetary policy

A

How much bank needs to put aside)?

Try to influence the economy through interesr rate

MPC Bank of England sets bank rate 8times a year

Attracts wide media and market attention

Central bank must also ensure that the market interesr rate matches the target rate

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24
Q

Monetary policy is cricial globally

A

ECB (eurozone)

Federal reserves (US)

Other central banks world wide

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25
How to set
What we want Control inflation and price Management output and employment Stabilise exchange rate Who’s gonna set this Fits macroeconomic strategy
26
Who sets
GOVERMENT sets a target and implement interest rate Independent central bank WOTH gov set rather BoE targets 2% inflation Fully informed central bank ECB set both target and tools
27
Short term or long term views
Short- fine running to hit inflation or money supply targets Long term prevent excessive growth or contraction of money supply
28
Overgrowth and undergrowth
- inflation - recession or credit crunch
29
Sources of monetary growth
Banks lowering liquidity ratios Public sector borrowing from banking sectors
30
Controlling bank liquidity
Central bank can impose a minimum reserve ratio -requires banks to hold a % of deposits as cash/reserves Prevents banks from reducing liquidity and expanding credit Historically used widely -some countries set very high ratios - increase in money supply we decrease the liquidity) iDK check
31
Challange in regulation
Banks may find ways to circumvent restriction Post 2000s excessive lending led to increased calls for -greater bank regulations -adequate capital and liquidity levels -reduced exposure to default risk
32
Controlling public sector deficit
Borrowing from banks increases money supply Safee to finance deficit vis bonds (not bills) -but require offering higher interesr rate -this causes financial crowding out (private sector borrowing reduced) To reduce monetary growth without crowding out. GOVERMENT must cut deficit
33
Techniques to control the money supply
Commo goal : influence credit by altering baking system liquidit Open market operations Central bank lending to banks Finding operations Variable minimum reserve ratio
34
Open market operarions
Central bank buys/sells gov securities (bonds/bills) Buying = increase illiquidity -> more credit -> higher money supply Selling= reduced liquidity-> less credit-> lower money supply Shoukd not deposit in because it’s not good
35
inelastic loan demand problems with interest rate policy
= large interest rates hikes needed to reduce borrowing high = discourage business investment = slower long term growth increase costs = production housing living = cost push inflation be politically unpopular due to higher borrowing costs for consumers authoriees may need to issue longterm securities = lock in high borrowing costs high interest rates attack foreign capital = raise exchange rate - hurts exporters and domestic firms competing with imports
36
Central bank lending to banks
Lends through gilt repos, re discounting bills, direct loans Higher rate = discourages borrowing = reduces money base (liquidity tjat allows for credit which reduced money supply)
37
Funding operations
Debt management office alters banks liquidity throught Issuing more bonds (iliquiduty) Issuing fewer bills (liquidity) Reduces bank liquidity and thus credit creation
38
Variable minimum reserve ratios
Requires banks to hold more liquid assets (deposits at central banks) Raising the ratio = reduces banks ability to lend = lowers money supply
39
Case for discretionary policy goodharts law
Once a target inflation becomes policy focus it may lose value as an indicator of A fixed inflation target could -mask underlying economic issues -be consistent with both book and recession
40
Keynesian argument
Economy faces frequent schosk(póki it cal,global, financial) Shocks alter injection/withdrawal -> multiplier/ accelerator effect Business cycles are irregular and unstable
41
Need for GOVERMENT action
Stabilise demand and reduce uncertainty Unchecked cycles hurt investment, long term growth and employment
42
Drawbacks of strict rules
Require frequent interesr changes -> unstable business planning
43
Attitudes towards demand management
Attitudes towards demand management - combination of fiscal and monetary policies - constainted discretion
44
Case for rules and policy frameworks
Political behaviour -seeking re-elections or courting popularity -political business cycle -loss of credibility Time lags with discretionary policy- Initial under and then over correction
45
Set and stick to rules
Helps to reduce inflationary expectiaons Create a stable en hormone for investment and economic growth
46
Limiataiorns if monetary policy
Not precise for controlling aggregate demand - weak when opposed by firm or consumer expectations or implement too late Time lags and imprecision and inevitable
47
Expansionary policy in recession
Even with low interst rate or high liquidity firms may not invest or consumer may not borrow liquidity trap = interest near sero= polic becomes ineffelcive JAPAN 2000
48
Forwards guidance
central banks guide future rate expectainions aims to boos confidence and encourage spending now
49
Problems with interest rate policy unstable demand for money
unpredictable shifts due to speculations on bond prices or exchange rates political events or global shocks
50
Banks aim to makami tan lending to to ear profits
Can borowin liquidity from central banks - higher cost passed on to customer via interesr rate = lending continuous despite central banks actions
51
Money supply is often determined by borrowing demand
If customer want to borrow and banks want to lend money supply grows
52
Problems with expanding money QE
Post 2008 central banks injected liquidity (Quantitative easing) Increases narrow money (bank reserves) But low confidence -> weak borrowing demand Banks caution to lend Result Broad money growth (M4) remained sluggish
53
Real interesr rate and equilibrium
Money supply Munder s = money demand Munderd
54
Tighter monetary policy To actually tighten monetary policy tbe central banks uses
Reduce money supply Rasie interesr rates and adjust money supply accordingly Keep interest rates low but cut money supply
55
Keep interesr rates low but cut money supply
Tricky if u reduce money available but keep interesr low demand will be higher than the supply This creates mismatch called disequilibrium To fix u need credit rationing deliberately limiting who can borrow
56
Reduce money supply
Reduces money supply from Q1 to Q2 the interesr rate rises from r1 to r2 This is because less money is available so borrowing becomes more expensive
57
Raise interesr rates and adjust money supply accordingly
Set rate at r2 This higher rate discourages borrowing As demand for loans drops banks lend less which reduces the money supply
58
National debt
Deficit require borrowing Issue bonds (gilts) or treasury bills Borrowing from banks increases money , supply from private sector tjat ISNT Deficit - annual borrowing (flow concept) Debt - accumulated deficit (stock concept) National debt not equal foreign debt
59
General GOVERMENT deficit
Total expenditure > total revenue
60
General GOVERMENT surplus
Total revenue > expenditure

Business Economic's (19 decks)

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