Macro

• monetary policy 


  use of:

  • interest rates
  • changes in money supply
  • exchange rate

  to affect AD
• Quantitative easing 


  form of monetary policy

  central bank buying financial assets to increase the money supply (encourage spending)

  • encourages commercial banks to lend at cheaper rates
  • expansionary monetary policy
• inflation target 


  2% CPI +/- 1%
• higher interest rates lead to…

  • increased incentive to save
  • reducing consumer spending (C)
  • reducing investment (I)
• higher interest rates lead to…


  • stronger currency = cheaper imports
  • reduces inflation
  • eg: if fuel prices fall overseas, COP will fall meaning price for domestic goods will fall (lower prices levels = reduced inflationary pressure)
• decrease in interest rates leads to…

  • increased spending (if inflation is too low)
  • increased productivity due to lower COP
  • can increase employment due to increased production
• Monetary Policy Committee


  set the base rate for commercial banks (interest rate) and determine QE
• the monetary policy committee consider … when determining the bank base rate

  
  

  • real GDP growth
  • output gap
  • rate of growth of COP
  • exchange rate
  • rate of growth of asset prices
  • confidence in the economy
  • financial market conditions
• Quantitative easing: how it works

  s

  • central bank generates money electronically
  • makes large purchases of assets
  • cash received is given to commercial banks
  • increases their liquidity and encourages cheaper loans
  • leads to an increase in consumption and investment
• increased demand for government bonds leads to..

  d

  • a fall in the bonds yield (inverse relationship)
  • may cause currency to depreciate
  • increases exports (increased AD)
• expansionary monetary policy:

  stimulating AD growth to prevent deflation

  • lowering interest rates
  • increasing money supply
• contractionary monetary policy:


  slowing AD growth to control inflation

  • increased interest rates
  • decreased money supply
  • a stronger exchange rate
• weaknesses of monetary policy

  z

  • can conflict with fiscal policies
  • time lag (effects mainly seen in long run)
  • has less impact ( house ownership is low, mortgage rates are usually fixed)
  • can affect distribution of income (increased inequality)
• exchange rate


  price of one currency in terms of another
• effects of a deprecation in currency

  SPICED (strong pound imports cheap exports dear)

  • increase in import prices
  • decrease in export prices
• effects of appreciation of currency

  WPIDEC (weak pound imports dear exports cheap)

  • a decrease in import prices
  • an increase in export prices
• depreciation of currency can lead to..


  /

  • boosts AD (increase in exports) demand-pull inflation
  • fall in SRAS (higher price of imports - materials) cost-push inflation

  overall a rise in inflation: inflationary pressure
• an appreciation of currency leads to…

  • decrease in AD (fall in exports)
  • rise in SRAS (lower price of imports - materials)
• Fiscal policy

  use of taxation, government spending, government borrowing to influence the economy
• direct tax

  tax on income and wealth
• indirect tax 


  tax on goods and services (spending)
• progressive tax

  tax that that’s a higher proportion of income from those with higher incomes
• proportional tax


  tax that takes the same proportion from all
• regressive tax


  tax that takes a lower proportion from those with higher incomes

  • eg: VAT
• effects of demand-side fiscal policies:

  s

  • fall in income tax - increases consumer spending - increases AD
  • leads to short-run economic growth - reduces negative output gap by using unemployed resources - demand-pull inflation
• public spending

  spending by the government to influence AD
• capital spending 


  investments by the government in the economy's infrastructure
• budget deficit

  government spending > government taxation

  annual amount borrowed by the government
• budget surplus

  government spending < government taxation
• increased budget deficit leads to..

  
  

  • increased government spending in an economy
  • increased investments in an economy
  • increase in AD
• supply-side policies

  focus on increasing the supply of goods and services to encourage greater productivity and growth