economic policy

• monetary policy?

  the manipulation of interest rates, credit and the money supply in order to manipulate AD

  several tools involved:

  interest rates-higher interest makes borrowing more expensive and reduces discretionary income and AD

  credit controls- can be set up by governments, limiting the lending that banks and other financial institutions can undertake, making repayment periods shorter and higher deposits, reducing AD

  Direct money supply controls: Bank fo England can limit or increase money flowing around the economy eg quantitive easing
• fiscal policy?

  the manipulation of the governments budget through spending and taxation to manipulate AD

  Deals with managing the level of total spending in the economy by altering government spending, and taxation

  If government spending is greater than taxation (budget deficit) the government must borrow to cover shortfall (from public, financial institutions and other governments) Known as PSNCR (public sector net cash requirment- flow of new debt each year) and adds to national debt
• supply-side policies: policies that increase the quality or quanity of FoPs to increase AS

  Policies encourage supply side of the eocnomy- enourages producers to operate more effectively. Aims to increase competiton, reduce constraints on competitive behaviour, incentives to work

  EG: reduce tax and NI, reducing benefits- encourage working

  reducing red tape- encourages business and innovation

  removal of gov intervention in business- enourages business
• exchange rate policies: the manipulation of the supply of currency and interest rates to affect the exchange rates

  Exchange rate is the price of one currency in terms of another, affected by the government: buying and selling large amounts of currency itself and changing interest rates comapred to the rest of the worls
• fiscal policy?

  the manipulation of the governments budget through spending, tax and borrowing

  Objectives: influence AD to reduce unemployment or inflation, reduce national debt and redistribute income
• expansionary and deflationary fiscal policy?

  expansionary: to boost GDP and economic growth and reduce unemployment.

  Increase G, decrease T which increases AD causing increased RGDP and decreases unemployment

  AD curve shifts right

  deflationary: reduce inlfation

  decrease G, increase T, cuases decreased AD and decreased inflation
• to reduce national debt and redistribute income using fiscal policy?

  since 2010, the government have followed a policy of austerity which is an attempt to reduce government spending so its below tax revenue. In reality, ust reduces government spending and increases tax

  redistribute incom— by taxing those on hgiher incomes and giving benefits to those with lower incomes
• types of fiscal policy?

  automatic stabilisers: institutional features of the economy, which without government intervention will automatically change the level of G and T, within the economic cycle to dampen the effects

  Discretionary fiscal policy? direct intervention by the government in order to deliberately manipulate G and T to achieve specific policy goals
• automatic stabilisers throughout economic cycle?

  in a recession, less money is taken in VAT, duty, income and corporation tax, and kore is given out in benefits due to unemployment so boosts AD

  In a boom, more moeny is taken in from income tax, as hgiehr employment, spending rises increasing VAT and duty. Firms make more profits so more corporation tax. Less spent on unemployment benefits, so reduces AD to reduce inflation
• taxes?

  indirect: tax on expenditure such as: VAT, duty tax, road tax

  direct tax: levied on income and wealth: income, corporation, capital gains, counccil, NI, inheritance
• tax base?

  the total value of income/ sales/ wealth upon which taxes can be imposed

  increased GDP= increased tax base
• tax rates?

  the percentage of income/ sales/ wealth that is taken in as tax
• progressive taxation?

  a taxation system that takes proportionately more from those who can afford it eg income tax
• proportional taxation?

  takes the same proportion of income form everyone irrespective of the size of their income
• regressive taxation?

  a tax system that takes proportionately more from those who can at least afford it eg NI, council tax, poll tax and VAT
• population on LRAS?

  a rise in population of working age increases labour force and productive capacity. Affected by birth rates and net migration
• technology on LRAS?

  tech improvements are one of the biggest factors affecting labour productivty- better technology increases output per head and redcues waste leading to lower costs and greater capacity for firms
• investment on LRAS?

  if firms or governments invest, the capital stock will increase resulting in hgiher capacity
• education and skills on LRAS?

  improved education and vocational skills enable workers to be more productive and offer hgiher added value, increasing productive capacity
• infrastructure on LRAS?

  improved transport and better connectivity will reduce cots of firms and encoruage trade; important for boosting productive capacity
• government polcies on LRAS?

  governments can affect LRAS by supply side polcies relating to taxes, education, competitiveness and regulation. E.g deregulation and privatisation may increase effecienct and competitive pressure. Lower coroporation taxes may attract MNCs to set up in an ecnomy and encourage domestic firms to increase investment: increases quantity of capital
• attitudes to enterprise on LRAS?

  a stable economic and political climate may encourage entrepreneurs to invest and devlop business. Increases the quantity and qualitity of enterprise and capital
• factors affecting LRAS curve?

  population, technology, investment, education, infrastructure, government policies and attitudes to enterprise
• Laffer curve?

  as tax rates rise, so do tax rates (at a diminishing rate)

  Beyond a certain rate of tax, tax revenues being to decline due to various factors
• Factors affecting laffer curve?

  Income tax revenues fall as higher tax rates act as a disincentive to work

  Coporation tax revenues fall as firms move to other economies with lower taxes

  Indirect tax revenues fall as balck market activity rises

  All tax revenues fall as more worthwhile for tax avoidance

  Entrepreneurs take less risks

  Emigration will rise, as high tax payers leave
• Indirect taxes merits/ demerits?

  Good as they are harder to evade, easuer to change than direct, don't create disincentives to work and invest, good influence on demand of 'bad' products

  Bad as they risk cost-push inflation as prices rise with tax, generally regressive, if too high coulld encoruage avoidance
• direct taxes merits/ demerits?

  generally progressive which helps to reduce ineuqalities in incomes, only affects those in work so are fairer

  Create disincentives to work and invest, easier to evade than indirect taxes
• current spending by governments?

  The spending on the provision of goods and services that are used on a day to day basis

  Short term spending and renewed each year eg wages of hospital staff
• capital spending by governments?

  spending on physical assets like roads, bridges and rail networks, also known as social capital or infrastructure
• effects of government spending?

  increases in current spending increases AD, by increasing incomes and cinsumption but this can have inflationary effects

  Increases in capital spending increases the capacity of the eeconomy (LRAS)
• the budget?

  the government decides its spending and taxation pans on a yearly basis, also refered to as fiscal stance
• Budget deficit?


  a shortfall in government income comapred to spending

  To cover the deficit, the government borrows from the private sector, known as Public Sector Net Borrowing (PSNB)

  The government issues bonds/ gilts which are financial assets for a fixed amount of money at a stated amount of interest yearly (not %). At maturity date it must be repaid to bondholder.

  Adds to national debt
• net borrowing?

  new borrowing undertaken by the government each year, minus any debt that is paid off

  Known as PSNB

  If net borrowing ocurs, it adds to national debt

  If more is paud off, it decreases national debt
• national debt?

  the total amount of borrowing in the UK at any time
• budget surplus?

  givernment incomes exceeds expenditure

  The government can either: build up their reserves for a future economic crisis or repay outstanding debt by buying back bonds and reducing interest payments
• Loose fiscal stance?

  intended to icnrease AD

  Higher levels of government spending and lower tax rates

  May lead to a budget deficit, requiring the government to borrow money and national debt may rise
• tight fiscal stance?

  intended to reduce AD

  lower levels of government spending and hgiher taxation

  may lead to a budget surplus allowing the government to build up reserves or pay off part of national debt
• neutral fiscal stance?

  intedned to leave AD unchanged
• supply side fiscal policy?

  focuses mainly on capital and labour

  Fiscal polciy causing a rightward shift in LRAS, increasing the quantity/ quality of the factors of production
• lower income tax as a fiscal boost?

  increases the incentive to work, so increases the quantity of the labour force as economically inactive will return to the labour force