Macroeconomic Policy

What is fiscal policy?

Use of government spending and taxation to achieve its economic objectives

What are the 2 possible fiscal expansionary policies?

Lowering taxes & increasing government spending

What does expansionary policy cause?

Economic growth to increase

What would happen to income, expenditure, output and employment if the government reduced the income tax rate?

Disposable income increases → consumer spending increases → AD increases → output increases to meet demand → increases employment

What would happen to income, expenditure and output if the government spending increased?

Government spending increases more than tax receipts → increases AD → output increases to meet demand → increases disposable income

What does contractionary policy cause?

Economic growth to decrease

What are the 2 possible fiscal contractionary policies?

Increasing taxes & decreasing government spending

What is the upward multiplier effect?

Increase in any component of AD will leader to a proportionally greater increase in the equilibrium level

What is austerity?

Government policies to reduce expenditure and increase revenue from taxation during periods of budget deficit

What is cyclical deficit?

A budget deficit resulting from fluctuations in the economic cycle

What is structural deficit?

A budget deficit arising from fundamental changes in the economic structure

What are problems with a high deficit?

Opportunity cost is higher the longer the deficit lasts
Disincentive effect due to high taxes
Government will lack legitimacy

What are problems with reducing a deficit?

Austerity may have social costs
Affect income inequalities
Lower economic growth
Lack of investment may affect supply-side

Who are the 5 agents in the financial sector?

Banks, building societies, investment banks, insurance companies, Bank of England

How do commercial banks create money?

By providing individuals/businesses with loans e.g. mortgages

What are the 2 functions of the Bank of England?

Maintain monetary stability (2% inflation rate), oversee financial stability

What is operational independence?

The ability to set policy free from political influence

What is monetary policy?

Policy that aims to affect the price and quantity of money in the economy in order to achieve the government’s economic objectives

What is the bank rate/base rate?

The interest rate set by the bank of England which affects the interest rates in the rest of the economy

What would happen to income, expenditure, output and employment if the BoE increased the base rate?

Decreased incentive to borrow → decrease AD → GDP will fall as there’s lower demand → employment decreases → inflation may decrease → decreases disposable incomes

What’s quantitative easing?

When the BoE creates more money, uses this to buy financial assets from banks so the banks have more money. This is then lent to consumers/businesses to boost AD

What are supply-side policies?

Policies that aim to increase the efficiency, productive capacity and flexibility of the economy to increase the growth rate

What are the key benefits of a successful supply-side policy?

Improve international competitiveness
Increases productive capacity
Increases employability of worker
Reduces unit costs

What is interventionist policy?

When the government takes more of an active role in the economy to improve economic performance

What should increasing the provision of education and training do?

Increase workforce productivity
Increase skills base of workforce
Make UK firms more internationally competitive
Make FDI more attractive

What is is a challenge to increasing the provision of education and training?

Opportunity cost to government
Could lead to misallocation of resources
Benefits won’t be realised till later

What should increasing the spending on infrastructure do?

Increase firm productivity
Increase flexibility of firms
Make UK firms more internationally competitive
Make FDI more attractive

What is a challenge to increasing the spending on infrastructure?

Opportunity cost to government
Could lead to misallocation of resources
Benefits won’t be realised till later

What should targeted assistance for businesses do?

Increase number of firms and so employment
Increase number of entrepreneurs → innovation

What is a challenge to targeted assistance for businesses?

Misallocation of resources
Might not be affordable
Industry might not survive if government withdraws support

What should nationalisation do?

Prioritise social benefits over profit motive
Set prices it deems fair
Good for natural monopolies

What is a challenge to nationalisation?

No motivation to be more efficient
Politicians may interfere base on political motives
May have no long-term investment

What is an incentive of lower income tax rates?

Increase incentives to work at given wage as keep more of their money

What is an incentive of lower corporation tax rates?

Increase incentive to invest in business through capital and innovation
May create more jobs

What is an incentive of lower benefit payments?

More of an incentive to enter labour market rather than rely on welfare state

What is deregulation?

The removal of regulations or restrictions on a particular business or industry

What would increasing the flexibility of the labour market do?

Cheaper to employ workers
Easier to hire/fire workers
Labour is more occupationally mobile

What is a challenge to increasing the flexibility of the labour market?

Workers have less of a voice
Effect income distribution
Social costs of low pay

What is competition policy?

Policy to increase competition in markets and make it easier for firms to enter markets

What would competition policy do?

Increase incentive to be efficient
Better QVC for consumers

What is a challenge to competition policy?

Require regulators to monitor competition level
Depends on level of competition

What is privatisation?

The process of transferring a public sector organisation to the private sector

What would privatisation do?

Profit motive may act as incentive for firms to be more efficient
Long-term view to be more productive
Lead to increased competition and lower prices

What is a challenge to privatisation?

Private monopolies may charge high prices
May still need regulating
Depends on industry

What are the benefits of supply-side policies?

Reduce inflationary pressures
Increases employment
Increases economic growth
Improves current account on BoP