EC131 Economics for Business - Steering the Macroeconomy

Flashcards covering fiscal and monetary policy, macroeconomic stability, and the role of government.

What is the role of the government, given the business cycle?

The government reduces the conflict between macroeconomic issues and creates macroeconomic stability.

What do demand-side policies affect and what is their duration?

Demand-side policies affect the aggregate demand and are usually short term (e.g., fiscal and monetary policies).

What do supply-side policies affect and what is their duration?

Supply-side policies affect the aggregate supply and are usually long term (e.g., increasing productive capacity).

What is the main function of fiscal policy as a demand management policy?

It manages the balance between government expenditure and taxation.

What is one of the primary goals of fiscal policy?

Prevent a severe recession.

How does fiscal policy smooth out fluctuations in the economy associated with the business cycle?

Reducing G and raising T during a boom, and raising G and reducing T during an economic slowdown.

What entities comprise the public sector?

Central government, local government, and public corporations.

What is the term for the deficit when government expenditure (G) exceeds taxation (T), financed through borrowing?

Public sector net borrowing (PSNB).

What is the primary method of borrowing to finance a deficit (G>T)?

Sale of government bonds, also known as gilt-edged securities or “gilts”.

What are the two types of fiscal policy?

Automatic fiscal stabilizers and discretionary policy.

What does discretionary fiscal policy involve?

Active government intervention since automatic stabilizers may not suffice during significant economic disequilibrium or GDP fluctuations.

What is the government budget equation?

G + Ig = T + PSBR

What does 'G' represent in the government budget equation?

Current public spending, such as day-to-day running of the economy.

What does 'Ig' represent in the government budget equation?

Capital public spending, such as construction of schools or hospitals.

What does 'T' represent in the government budget equation?

Government tax revenue

What does 'PSBR' represent in the government budget equation?

Public sector borrowing requirement.

How is the gap between government spending and taxation typically financed during a recession?

Borrowing, represented as G + Ig – T = PSBR.

According to the lecture notes, how could governments intervene in a recession?

Increasing Government spending (G).

What is one of the challenges with dicretionary fiscal policy in relation to temporary and permanent tax cuts?

A cut in tax may be viewed as temporary or permanent, only a permanent cut in tax could lead to higher consumption

What is one of the challenges with dicretionary fiscal policy in relation to private individuals?

Borrowing from private individuals and firms could increase interest rate, which in turn may discourage private individuals and firms from buying on credit

What is one of the challenges with dicretionary fiscal policy in relation to globalisation?

The risk of undermining the fiscal policy of the government may be higher because of increased interdependence between countries owing to globalisation.

What happened with the fiscal rules in UK during the 2008/9 crisis?

Fiscal rules were abandoned; VAT was cut from 17.5% to 15%; PSNB jumped from 2.9% in 2007/8 to 10.3% in 2009/10; PSND jumped from 35.8% to 63.9%

How does the central bank independence affect monetary policy?

Central bank independence gives credibility to monetary policy, otherwise there may be a temptation to hold interest rates down ahead of election to stimulate spending, disregarding its long-term consequences