Week 2 Flashcards
(18 cards)
Economic regulators?
Fiscal Policy
Monetary Policy
Direct Controls
What is a Fiscal policy?
Fiscal policy is concerned with the government’s budget. The size and composition of government spending and how this spending is financed: taxes or borrowing.
E.g. The government reduces V.A.T. in order to stimulate consumer spending
or
If a government starts a road-building programme partly for transport reasons but also in order to stimulate aggregate demand then that is fiscal policy
What is a Monetary policy?
Policies that influence the quantity and price of money.
How easy is it for firms or individuals to get credit? What is the rate of interest charged on loans?
What are Direct Controls?
For our purposes any action which is designed to help achieve the government’s macroeconomic objectives and is not fiscal or monetary policy.
Legislation on competition among firms; legislation on employee relations; training matters; privatisation of industry.
What is an income policy? (Direct Controls)
In the past governments have had prices and income policies. These policies were thought necessary to fight inflation. Under these policies, it might be illegal to put up prices or to increase employees wages by more than a given percentage.
What is an exchange rate policy? (Direct Controls)
Governments sometimes deliberately vary the exchange rate of their currency or hold the rate to a particular value in order to achieve an economic objective. At present, the Chinese government is being accused of deliberately keeping the value of its currency low against other international currencies such as the dollar or pound so that China’s exports are cheaper and U.K./U.S.A. exports to China dearer.
Circular Flow of Income - What two groups are the economy divided into and explain each one.
Households: consumers of goods and services, suppliers of labour and various other factors of production
Firms: producers of goods and services, and employers of labour and other factors of production
Circular Flow of Income Injections?
Investment (I): from previous savings, loans, or share issuing. e.g. new machinery, vehicles, training costs.
Government expenditure (G): money spent by government on goods and services produced by firms e.g. spending on a road or new hospital
Export expenditure (X): sales of goods and services abroad
Circular Flow of Income Withdrawals?
Net savings: income that households choose not to spend
Net taxes: money paid to government e.g. VAT and Income tax
Import expenditure (M): Consumption of imported goods, profits go abroad
Factors influencing consumption?
Lifestyle Permanent Income Life Cycle Income Culture (e.g. attitude towards savings) Availability of credit
Factors influencing Investment?
Cost (of financing) Business confidence Technical changes Wear and tear Government attitude
Factors influencing Exports?
Reputation of goods Exchange rates Local market regulations Ability of buyers to finance purchases Government regulations Rate of interest on borrowing
Factors influencing Government expenditure?
Government policies and ideology of ruling party
Government’s ability to borrow and the cost of such borrowing
Range of services provided by government
International obligations
Factors influencing Savings?
Influenced by culture – some economies/societies save more than others
The rate of interest will influence saving but not normally by as much as people might think.
The expected provision of social services will influence saving – if people think that they will get a small government pension on retirement then they might have to save more
If Injections > Withdrawals what happens to AD
AD rises
If Injections < Withdrawals what happens to AD
AD falls
Why would an increase in AD not always lead to an increase in output?
Not necessarily enough skilled workers in technical economy.
What is the multiplier effect? Can be Pos or Nega
If someone who is unemployed gets a job she will spend some of her income. In doing so she creates work for others – other people get employed and they spend and so on.
Unfortunately the effect works in reverse: if a factory closes and the employees are made redundant then they spend less and so some other employees may lose their jobs.
Generally one for one.
