Unit 2 - The UK economy - performance and policies
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A* summary of macroeconomic policy sand objectives
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Unit 2 - The UK economy - performance and policies
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PEARSON (PEARSON)
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Unit 2 - The UK economy - performance and policies
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2.6 Macroeconomic objectives and policies
2.6.2 Demand-side policies (SR growth)
b) Fiscal policy (only talking abt G and hire ppl)
Def: A deliberate manipulation of government spending and tax so as to shift
AD
Expansionary fiscal policy (reflationary/loose)
Close output gap
Recover recession
Contractionary fiscal policy (deflationary/tight)
Decrease G, increase tax
c) Monetary policy
Def: A deliberate manipulation in interest rate and money supply to shift AD
Expansionary monetary policy
Contractionary monetary policy
Ir set by MPC targeting at 2% +/- 1% of CPI
QE:
Central bank increase money supply electronically to buy bonds from private
banks increase demand for bonds decrease yield decrease cost of
borrowing and lower Ir therefore C increase I increase
MS increase decrease in price of pounds (depreciation) so price of X fall, X
rises. Price of M rises, M falls => improve current acc.
(Brexit) Tapering:
Central bank reduce the amount of bonds they buy from private banks reduce
demand for bonds increase yield increase cost of borrowing + interest rate
goes up therefore C falls I falls
Current acc. worsen:
Because by increasing Ir investors demand more for pounds + fall in supply
for pounds (due to Ms fall) appreciate price of export rises value of export
falls + price of import falls value of import rises worsen current acc.
Extra: (if question ask how lead to inflation)
Central bank print less money to buy bonds reduce Ms monetary value of
pounds rises purchasing power of pounds increase inflation
, EVA:
1) Time lag to transfer electronic money to consumers (18-24 months) to make
decisions on the Ir
2) Lose confidence in assets and stock market so invest little
d) Two types of fiscal policies:
Automatic stabilizers: automatically react to changes in economic cycle
Discretionary policy: government deliberately change the level of exp. & tax
e.g. infrastructure
g) The role of the Bank of England
*Ir 2% +/- 1% of CPI
h) Awareness of demand-side policies in the Great Depression and the
Global Financial Crisis of 2008
Great Depression Financial Crisis 2008
Difference interpretation:
Contractionary fiscal policy (rise Austerity measure (reduce fiscal
tax, reduce government spending) + QE
spending)
Banks were allowed to fail Banks were bailed out by QE
Policies to response:
Believe ‘balance the budget’ Immediately brings in
e.g. when situation is expansionary fiscal policy
government low rev but high tax, increased AD
used contractionary which But, increase national debt
worsen the case
Until lata on expansionary brings
in sin improve
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