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Economics 2.6.2
Economics- Edexcel 2.6.2
| Term | Definition |
|---|---|
| 3 broad categories of macroeconomic policy | fiscal policy/monetary policy/supply side policy |
| fiscal policy | policies that involve government spending, taxation and/or borrowing to affect AD |
| monetary policy | policies relating to interest rates, the money supply and/or the exchange rate |
| supply side policy | policies that increase the productive potential of an economy, usually in relation to increases in the quantity and/or quality of an economy’s factors of production |
| stimulus policy | any monetary policy and/or fiscal policy aimed at encouraging higher growth and/or inflation |
| average tax rate | the average tax rate measures the percentage of someone’s income that is paid in tax |
| bond yield | rate of interest paid on government debt yet to be repaid |
| budget balance | annual balance between government spending and tax revenues |
| G>T | budget deficit |
| G<T | budget surplus |
| budget fiscal deficit | difference between what the government receives in revenue and what it spends |
| cyclical fiscal deficit | size of the deficit is influenced by the state of the economy; in a boom tax receipts are high and spending on unemployment benefits is low |
| direct taxation | taxes on income, profits and wealth paid directly by the bearer to the tax authorities |
| fiscal policy | taxation and spending measures that allow the government to guide the economy |
| fiscal stimulus | government measures aimed at giving a positive jolt to economic activity |
| indirect taxation | taxes on expenditure(VAT) paid to tax authorities indirectly by the suppliers of the goods or services |
| marginal tax rate | tax that is paid on extra income |
| national debt | total amount owed by the government sector that has accumulated over the years |
| progressive tax | where the average rate of tax rises as income increases(richer households pay a higher percentage of their income in tax than poorer families) |
| regressive tax | tax imposed by a government which takes a higher percentage of someone’s income from those on low incomes with the burden of the tax falling more heavily on poorer households |
| structural fiscal deficit | part of the deficit which is not related to the state of the economy (this part of the deficit will not disappear when the economy recovers) |
| automatic fiscal policy | built into the budget program by setting the net tax rate, and work automatically |
| justifications for government spending | provide public goods & correct market failures/provides safety-net system of welfare benefits/provide necessary infrastructure/manage level and growth of AD/promotes equity/improving economic efficiency & competitiveness |
| how government spending affects income and inequality | welfare state transfers(benefits, pensions) state-provided services/social protection |
| what is exempt from VAT | rent on domestic dwellings, private education, health service, postal services, burial and cremation, small traders below the turnover limit for VAT registration |
| changes in income tax and national insurance impacts what? | disposable incomes(AD) |
| changes in corporation tax impacts what? | post-tax profit available for businesses to invest(AD) and incentive(AS) |
| changes in employers’ national insurance impacts what? | cost of employing extra workers(AD) |
| changes in VAT impacts what? | retail prices and real incomes of consumers(AD) and business costs(AS) |
| changes in direct taxes can impact? | work incentives(AS) |
| changes in business taxes can impact? | level of foreign direct investment into a country |
| government borrowing | money that the government borrows to spend on public services |
| main causes of a budget deficit | recession, decrease in consumer spending means less tax revenue, increase in economic inactivity, fiscal stimulus, increase in interest rates on debt, demographic factors |
| demographic | a particular sector of a population |
| Keynesian economists fiscal policy | believe that fiscal policy is the most effective form of managing, demand, output and confidence at times of economic instability |
| discretionary fiscal changes | deliberate changes in direct and indirect taxation and government spending |
| automatic stabilisers | changes in tax revenues and government spending that come about automatically as an economy moves through the business cycle |
| examples of automatic stabilisers | tax revenues/welfare spending/budget balance and the circular flow |
| austerity | when the government uses contractionary fiscal policy to decrease their budget deficit |
| policies to reduce size of a budget deficit | cuts in government spending, higher taxes and supply-side policies to encourage growth |
| MPC | monetary policy committee |
| current tools of monetary policy | changes in policy interest rate and the supply of money |
| exchange rate is determined by | demand and supply in international foreign exchange markets |
| MPC sets what? | base rate |
| other name for base rate | bank rate |
| monetary stability | stable prices and confidence in the currency |
| expansionary monetary policy | fall in nominal and real level of interest rates, measures to expand or increase the supply of credit from the commercial banking system, depreciation of the external value of the exchange rate |
| deflationary monetary policy | higher interest rates on both loan and savings, tightening of credit supply, appreciation of exchange rate |
| interest rate transmission mechanism | helps to explain how changes in monetary policy interest rates feed through to influence AD, growth of output and changes in consumer prices |
| why does it take long for interest rates to have n impact on output and inflationary pressures? | uncertain time lags |
| what is an expansionary monetary policy designed for? | lift consumer confidence and demand during a downturn |
| other name for expansionary monetary policy | loose monetary policy |
| other name for deflationary monetary policy | tight monetary policy |
| contractionary monetary policy | a monetary measure to reduce government spending or the rate of monetary expansion by a central bank, usually by raising interest rates |
| contractionary monetary policy other name | restrictive monetary policy |
| mortgage interest rates | determine how much homebuyers are charged to borrow and buy a property and what monthly repayments will be |
| when interest rates are close to zero | lead to excess AD and risk of higher demand-pull inflation |
| liquidity trap | when consumers and businesses do not respond positively to cheap money by increasing their own spending perhaps because they are expecting interest rates to rise in the future |
| real spending power of savers when nominal interest rates are less than 1 percent | real return on saving is likely to be negative |
| mal investment | the action or fact of investing money in an ill-judged or wasteful way |
| what leads to mal investment? | low interest rates as investment projects go ahead that wouldn’t have been considered viable |
| what does cheap money lead to? | rapid expansion of demand for mortgages and a rise in house prices |
| cheap money | money that can be borrowed with a very low interest rate or price for borrowing |
| what does low interest rates lead to? | higher consumer demand, increases demand for imports, worsens country’s external trade position |
| quantitative easing | a form of monetary policy in which a central bank purchases securities from the open market to reduce interest rates and increase the money supply |
| roles for central banks | monetary policy function, financial stability & regulatory function, policy operation functions, financial infrastructure function, debt management |
| monetary policy function | setting of the main monetary policy interest rate/quantitative easing/exchange rate intervention |
| financial security and regulatory function | prudential policies designed to maintain financial stability of banks and other lenders |
| prudential | involving or showing care and forethought, especially in business |
| policy operation functions | ‘lender of last resort’ to commercial banking system(stability)/managing levels of liquidity |
| financial infrastructure function | overseeing payment systems used by banks, retailers, credit card companies |
| QE | quantitative easing |
| debt management function | handling the issue and repayment of issues of government debt |
| factors considered when setting policy interest rates | GDP growth&spare cap/equity markets/trends in prices/consumer confidence/growth of wages, labour productivity/unfilled vacancies/trends in foreign exchange markets/international data |
| quantitative easing | introduction of new money into the national money supply by a central bank |
| main aims of quantitative easing | increase supply of money available for banks to lend |
| alternative strategy to cutting interest rates | QE |
| key channels through which QE operates | wealth effect/borrowing cost effect/lending effect/currency effect |
| wealth effect meaning | lower yields lead to higher share and bond prices |
| yields | how much income an investment generates, separate from the principal |
| borrowing cost effect | QE lowers the interest rate on long term debt |
| lending effect | QE increases the liquidity of banks and increased lending from banks lifts incomes and spending in the economy |
| currency effect | lower interest rates have the side effect of causing the exchange rate to weaken which helps exports |
| steps of quantitative easing | central bank creates ‘new money’ electronically, used to buy financial assets, more demand = higher prices for assets, lower yield on government bonds, fall in LT interest rates & increased cash, stimulates AD through C & I |
| monetary financing | direct transfer of money from a central bank to a government to help fund their spending, possibly involving purchase of newly issues government debt by a central bank |
| exchange rate | rate or price at which one country’s currency can be exchanged for other currencies in the foreign exchange market |
| FX | foreign exchange |
| what determines the price of the exchange rate? | global currency markets |
| UK effective exchange rate | weighted index of sterling’s value against a basket of currencies the weights are based on the importance of trade between the UK and each country |
| appreciation | rise in the value of a currency against others, in a freely floating exchange rate system, currency is stronger if appreciated |
| depreciation | fall in the value of a currency against others, in a freely floating exchange rate system, currency is weaker if depreciates |
| devaluation | fall in value of currency against others, in a fixed exchange rate system, currency is weaker if devalued |
| exchange rate | rate at which one currency is traded against another |
| fixed exchange rate | system in which the government / central bank intervenes in the FX market to determine the value of its currency |
| floating exchange rate | system in which the value of a currency is determined entirely by the market forces of demand and supply |
| revaluation | rise in the value of a currency against others in a fixed exchange rate system, currency is stronger if devalued |
| SPICEE | strong pound imports cheaper exports expensive |
| currency appreciation effect | imports cheaper, outward AS, exports more expensive, inward AD |
| currency depreciation | rise import prices, cost-push inflation, energy & food bills higher/exports cheaper, strong trade balance, rise AD real GDP & jobs/stimulates labour market, weaker point has similar effect to fall in interest |
| key origins of the 2007-2009 Global Financial Crisis | sub-prime lending, financial innovation, asset price bubble, regulatory capture |
| asset price bubble | banks lent out too much to investors who expected prices to rise |
| sub-prime lending | lending to high-risk homebuyers many of whom had poor credit histories |
| regulatory capture | example: failure of the credit ratings agencies in pricing complex and risky bonds |
| policy responses from central banks and national governments | low interest rates, quantitative easing, bank bail outs, fiscal stimulus |
| arguments in favour of stimulus policies after a crisis | prevents economic depression, create jobs, avoid price deflation, support confidence |
| weaknesses to stimulus policies | Keynesian liquidity trap, moral hazard, impact on savers, rising property prices |
| demand-side policies possible impacts on AS | cuts in taxes on income can stimulate increase in labour supply, increased G can lead to influx of FDI, reductions in indirect taxes increase SRAS & increase operating profits, infrastructure increases capital stock |
| demand-side policies during the 2020-21 pandemic | job retention scheme, cut in value added tax for hospitality & travel businesses, government-backed business loans, BoE cut interest rates & expanded QE, increase state welfare payments |
Created by:
jessharris
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