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Description
Flashcards by Amardeep Kumar, updated more than 1 year ago
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Created by Amardeep Kumar
almost 9 years ago
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| Question | Answer |
| What are the 4 macro-economic objectives of the UK governement? | -Price stability -Low unemployment -Sustainable economic growth -Trade balance on the current account |
| What are the 3 policy instruments used by the government to achieve these objectives? | Fiscal policy Monetary policy Supply-side policies |
| Define the Fiscal policy. | The Fiscal policy is the use of government spending and taxation to influence the components of economic activity such as output and employment. There are three types of government spending - capital, current and transfer. |
| What is capital spending? | This is spending on items which benefit the economy for more than one year such as buildings, roads, and factories. |
| What is current spending? | This is spending on items which benefit the economy for less than one year such as salaries for public sector workers. |
| What is transfer spending? | This is spending on welfare such as benefits e.g. disability or unemployment, or pensions. |
| What are the 2 types of taxes levied by the government? | Direct taxes on income and wealth such as Income tax, National insurance, Corporate tax, Council tax, Inheritance tax etc. Indirect taxes on consumer spending such as VAT, excise taxes (particularly on demerit goods), road tax, fuel tax etc. |
| What is meant by a fiscal surplus, and what effect will they have on the economy? | Fiscal surplus means tax revenues exceed governement spending. This will have a negative multiplier effect on the economy because withdrawals exceed injections. |
| What is meant by a fiscal deficit and what effect will it have on the economy? | Fiscal deficit means government spending exceeds tax revenues. This will have a postive multipier effect on the economy because injections exceed withdrawals. |
| What is the difference between an expansionary and contractionary fiscal policy? | An expansionary fiscal policy means the government will spend more and tax less leading to a fiscal deficit. A contractionary fiscal policy means the government will spend less and tax more leading to a fiscal surplus. |
| Define austerity. | Austerity is the result of the government applying a contractionary fiscal policy to ultimately reduce the budget deficit, leading to a fall in living standards. |
| What effect will higher government spending have on the economy? | > AD will shift to the right as government spending is a component > This will lead to rise in the price level and a rise in output and employment > Higher output will lead to higher investment spending according to the acclerator principle. |
| What effect will a decrease government spending have on the economy? | > AD will shift to the left as government spending is a component > This will lead to a fall in the price leval and a fall in output and employment > Lower output will lead to lower investment according to the accelerator principle. |
| How can the fiscal policy correct market failure regarding the consumption of merit and demerit goods? | Consumption of demerit goods can be reduced by indirect taxes Consumption of merit goods can be increased through government spending on subsidies |
| How can the fiscal policy be used to correct externalities in? | Negative externalities can be reduced by taxation on production of goods Positive externalities can be increased by subsidising production of goods |
| How can the fiscal policy reduce income inequalities? | Inequalities of income can be reduced by welfare spending on low income households, and increased taxes on higher income households. |
| What is the monetary policy? | This is the use of monetary instruments - base insterest rates, money supply and exchange rate - to influence the level of prices, output and employment in the economy. |
| Who is responsible for conducting the governments monetary policy? | The Bank of England (also known as the Central Bank). Their role is to: Set the base interest rate Control the supply of money |
| What is the core process of the Bank of England? | The core process of the Bank of England is to maintain the value and integrity of the national currency (sterling). |
| What is the target rate of inflation set by the government for the Bank of England? | 2%. This is seen as the key to price stability and sustainable levels of output and employment. |
| Who is responsible for setting the base rate of inflation in the UK? | The Monetary Policy Committe of the BofE is responsible for setting the base interest rate. |
| How will the MPC respond to a high rate of inflation? | The MPC will respond by raising base interets rates to lower aggregate demand. This is because higher interest rates raise the cost of borrowing and discourage spending and encourage saving. |
| How will the MPC respond to a low rate of inflation? | The MPC will respond by cutting interest rates to increase aggregate demand. Lower interest rates lower the cost of borrowing and encourage spending. |
| What effect will a rise in interest rates on the exchange rate? | A rise in UK base interest rates should in theory lead to an appreciation of the exchange rate. This will mean imports are cheaper and exports are dearer. |
| What effect will a fall in interest rates have on the exchange rate? | A fall in UK base interest rates should in theory lead to a depreciation of the exchange rate. This will mean imports are dearer and exports are cheaper. |
| What is quantitative easing? | Quantitative easing is when the Bank of England increase the supply of money into the economy by printing extra notes and coin. |
| What effect will quantitative easing have on the economy? | The effect of quantitative easing is lower interest rates, which lead to increased borrowing. An increase in borrowing leads to higher consumption and higher aggregate demand in the economy. |
| When can quantitative easing generate inflationary pressures? | When economy is operating above its trend rate of growth. |
| Define supply side policies. | Micro-economic policies designed to raise the underlying trend rate of economic growth without generating inflationary pressures. They involve improving the efficiency of factors production. |
| How can cutting taxes on income and profits incentivise employers and employees? | Cutting income tax rates increases disposable income and makes work more attractive than unemployment and welfare. Cutting coprporation taxes allows firms to keep more profits after tax that can be used for investment. |
| What effect does liberalising markets have on consumers? | This increases competition in the markets and leads to better allocative efficiency as consumers have more choice and pay lower prices. |
| How can improving the mobility of labour encourage employment? | The government can use taxes and unemployment benefits to encourage the unemployed back into work. Spending on education and training reduces the likelihood of unemployment in the future. |
| How can deregulation improve the productive efficiency of firms? | Cutting the rules and regulations that restrict firms can lead to greater enterprise and innovation. Offering tax breaks and subsidies to new businesses - one in three new businesses goes bust within the first year. |
| How can the government prevent trade unions disrupting production? | Reducing the power of trade unions will reduce the likelihood of unions organsising strikes, which disrupt activities in the related markets. |
| How is migration a supply side policy? | This allows skillled workers from overseas to be imported into the economy, and particularly in markets where there are shortages. |
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