Economic Policy [Lectures]

What are microeconomics?

What are microeconomics?

the study of economic activities and interaction of individuals, households, businesses, and other groups at the subnational level

What are macroeconomics?

the study of the impact of economic activities at all levels create a national (and global) economic envirnment

What are the components of well-being?

good living standards; stability and security; financial, social and ecological sustainability

Why does it matter if we are rising per capital production, so it guarantee growing standards of living?

it matters because of what and how it was produced but also for whom economic growth occurs

What happened in the classical period / economics?

Adam Smith; laissez-faire; Say’s Law; “neutral” money

markets generally function smoothly at least as long as governments do not interfere

What is laisse-faire?

an economy with little government regulation

Why did classical economists believed in Say’s Law?

because “supply creates its demand”, and so the shortage of aggregate demand can’t be a problem

Why is money “neutral”?

changes in money supply only change prices and economic activity so it isn;t influenced by money supply

What are the advantages of the market?

information and decision making are decentralized; producers may respond to consumer needs

What are the limitations of the market?

lower public goods; externalities; transaction costs

What does Keynesian economics mean?

named after J. M. Keynes; incorporates fiscal and monetary policy

-market economies need more help from government policies

-understanding the workings of the macroeconomy requires that one goes beyond the model of supply and demand

What is fiscal policy?

should be used to keep aggregate demand high and high employment

uses the government revenues collection (taxes) and expenditures (spending) as well as other instruments (public debt) to influence a country’s economy

What are the types of fiscal policy?

expansionary and contractionary fiscal policy

What is expansionary fiscal policy?

measure to decrease taxes and/or increase government expenditures

lower taxes increase disposable income to encourage people to spend more

it can create a budget deficit

What is contractionary fiscal policy?

measure to increase tax rates and decrease government expenditures

aimed at reducing economic growth (lower demand) when inflation happens we have a significant increase in aggregate demand and the money supply (excessive)

What is monetary policy?

should be used to support aggregate demand and “fine-tune” the economy

a central bank’s actions that manage the money supply in order to obtain specific objectives

What are the objectives of monetary policy?

counteracting inflation (price stability); economic growth; full employment

What are the instruments of monetary policy?

quantitative (interest rates, open market operations, required reserve ratio)

qualitative (credit regulations, licencing)

conventional (interest rates, money supply, currency policy, required reserve ratio)

unconventional (zero and negative interest rate policy, quantitative and credit easing. liquidity support)

What is quantitative easing (QE) in monetary policy?

form of monetary policy in which central banks purchase securities from the open market to reduce interest rates and increase the money supply

creates new bank reserves, providing banks with more liquidity and encouraging lending

typically implemented when interest rates are near zero and economic growth is stalled

What are the side-effect of QE?

surge in demand for assets; increase in demand for commodities; problem of the date of withdrawal from quantitative easing

What is the expansionary (ease) monetary policy?

aimed at increasing the money supply by → decreasing interest rates; purchasing government securities by central banks and lowering the reserve requirements for banks

main objective → decreasing unemployment and stimulating business activities, and consumer spending, but that may lead to higher inflation

What is the contractionary (tight) monetary policy?

aimed at decreasing the money supply by → raising interest rates, selling government bonds, increasing the reserve requirements for banks

main objective → decrease inflation, but it may limit the economic growth

What is the countercyclical monetary policy?

aimed at moderating the cyclical fluctuations in the economy and stabilizing the economic growth around its trend path

What is economic policy?

use both fiscal and monetary instruments, as well as other sectoral policies and various action to influence or control behaviour of the economy

What are the market competitiveness’?

perfectly competitive (many buyers and sellers; free entry and exit) and self-correcting market (automatically adjusts to any imbalances between sellers and buyers

What are monetaries?

opposed Keynesian ideas, believed in impact of changes in money supply; government should not try to fine-tune economy

What are the goals of economic policy?

economic growth - incomes of consumers and firms increase over time GDP growth

full employment - every member of the labour force who wants to work can find a job

price stability - a decrease in general price results in an increase (stabilisation) in income

What is nominal GDP?

gross domestic product expressed in terms of current prices

What is real GDP?

a measure of gross domestic product that seeks to reflect the actual value of goods and servicces, by removing the effect of change in prices

What is the consumer price index?

measures changes in the prices of goods and services bought by households

What is the main element of the public budget?

debt issue + revenues = expenditures + debt servicing

What is the budget balance, deficit and surplus?

balance → when revenues = expenditures

deficit → when revenues < expenditures

surplus → when revenues > expenditures

What are the budget instruments?

planning, social, economic and political

What is public debt?

a debt owned by government (central, local and other public funds)

total borrowings by the public institutions

What is the DEBT to GDP ratio?

measures the gross debt of the general government as a percentage of GDP

key indicator for sustainability of government finance

changes in government debt over time primarily reflect the impact of past government deficits and/or debt rolling

What are the types of public debt?

short-term (up to 1Y), medium-term (up to 5Y) long-term debts

internal and external; in national/foreign currency; redeemable/irredeemable; voluntary/compulsory; productive/unproductive debts

but also debts of central and local governments; social security funds

What are the debt instruments?

domestic/foreign bonds; treasury bills; international financial institutions loans; private banking loans

What are the public debt buyers?

commercial banks; investment funds, insurance companies, central banks

What are the advantages of public debt?

in short-run → good way for countries to get extra funds to invest

much safer than foreign direct investment

improves the standard of living in a country

What are the disadvantages of public debt?

increase of public expenditures, decrease of investment activity in the public and private sector

can increase the risk of bankruptcy

Why growing public debt is dangerous?

lower national savings and income; higher interest payments; decreased ability to respond to problems; greater risk of fiscal crisis; impact on the interest rate and decreasing investments

What is the Keynesian economics?

tolerance for fairly high levels of public debt to pay for public investment in lean times (recession), so when boom time (prosperity) happens they can be paid back from rising tax revenues

What is the burden of debt?

measured by the debt-service ratio

What is the public debt management?

establishing and executing an effective policy for managing the public debt portfolio, so we can:

• raise the required amount of funding

• achieve cost (low interest rate) and risk objectives (increase debt maturity)

• to meet other goals as developing and maintaining efficient debt/credit market

What is the difference between gross and net public debt?

the value of assets owned by the government is subtracted from the gross amount to arrive at the net figure

What is the money supply?

the entire stock of currency and other liquid financial instruments circulating in a country’s economy at a particular time

What are the main channels that affect long-term economic growth?

tax system and public expenditures