Macroeconomic Policy

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What is fiscal policy?

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45 Terms

1

What is fiscal policy?

Use of government spending and taxation to achieve its economic objectives

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2

What are the 2 possible fiscal expansionary policies?

Lowering taxes & increasing government spending

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3

What does expansionary policy cause?

Economic growth to increase

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4

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

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5

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

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6

What does contractionary policy cause?

Economic growth to decrease

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7

What are the 2 possible fiscal contractionary policies?

Increasing taxes & decreasing government spending

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8

What is the upward multiplier effect?

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

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9

What is austerity?

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

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10

What is cyclical deficit?

A budget deficit resulting from fluctuations in the economic cycle

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11

What is structural deficit?

A budget deficit arising from fundamental changes in the economic structure

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12

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

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13

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

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14

Who are the 5 agents in the financial sector?

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

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15

How do commercial banks create money?

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

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16

What are the 2 functions of the Bank of England?

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

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17

What is operational independence?

The ability to set policy free from political influence

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18

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

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19

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

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20

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

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21

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

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22

What are supply-side policies?

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

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23

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

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

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24

What is interventionist policy?

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

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25

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

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26

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

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27

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

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28

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

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29

What should targeted assistance for businesses do?

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

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30

What is a challenge to targeted assistance for businesses?

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

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31

What should nationalisation do?

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

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32

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

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33

What is an incentive of lower income tax rates?

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

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34

What is an incentive of lower corporation tax rates?

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

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35

What is an incentive of lower benefit payments?

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

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36

What is deregulation?

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

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37

What would increasing the flexibility of the labour market do?

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

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38

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

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39

What is competition policy?

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

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40

What would competition policy do?

Increase incentive to be efficient
Better QVC for consumers

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41

What is a challenge to competition policy?

Require regulators to monitor competition level
Depends on level of competition

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42

What is privatisation?

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

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43

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

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44

What is a challenge to privatisation?

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

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45

What are the benefits of supply-side policies?

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

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