AS econ session 4
- 1. A Level Economics – Year 1 (AS) Revision Workshop Session 4 Demand Side policies (Fiscal and Monetary) 34 In this session we will consider how the Government of the UK uses fiscal and monetary policy to impact on their targets for the economy. We will look at the relative impact of some of the policies and discuss if any policies have conflicting outcomes.
- 2. A Level Economics – Year 1 (AS) Revision Workshop Your download link: www.tutor2u.net/asecon2016.pdf
- 3. A Level Economics – Year 1 (AS) Revision Workshop Ever used a Magic 8 Ball to answer your questions? One of our Magic 8 Balls has the correct answer to the questions you are about to be asked. Which Magic 8 Ball is correct? Be quick, you have only a few seconds!
- 4. A Level Economics – Year 1 (AS) Revision Workshop 'Magic 8 Ball, is the Bank of England still going to create money using Quantitative Easing as a policy tool in 2016?' 1 A B C
- 5. A Level Economics – Year 1 (AS) Revision Workshop 2 A B C 'Magic 8 Ball, will government spending on pensions be their single largest area of spending in 2016?'
- 6. A Level Economics – Year 1 (AS) Revision Workshop 3 A B C 'Magic 8 Ball, is ‘household consumption’ likely to be the largest element of aggregate demand in the UK in 2016?'
- 7. A Level Economics – Year 1 (AS) Revision Workshop 4 A B C 'Magic 8 Ball, what will be the National Living Wage rate per hour for anyone over 25 years old by 2020?
- 8. A Level Economics – Year 1 (AS) Revision Workshop Session 4 Demand Side policies (Fiscal and Monetary) 34 In this session we will consider how the Government of the UK uses fiscal and monetary policy to impact on their targets for the economy. We will look at the relative impact of some of the policies and discuss if any policies have conflicting outcomes.
- 9. A Level Economics – Year 1 (AS) Revision Workshop Quick definition time! 34 The use of government spending, direct and indirect taxation and government borrowing to affect the level and growth of aggregate demand, output and jobs Corporation tax Changes in interest rates, the supply of money & credit and exchange rates to influence the economy Tightening of credit supply You have 1 minute to define fiscal and monetary policies and give one example of each
- 10. A Level Economics – Year 1 (AS) Revision Workshop Examples from the Spending Review in November 2015 34 Reduce costs to stimulate growth Reduce dependency on state – improve employment Improve labour efficiency within the economy to promote growth
- 11. A Level Economics – Year 1 (AS) Revision Workshop Source: International Monetary Fund, data from 2015 onwards is a forecast 500 550 600 650 700 750 800 850 2010 2011 2012 2013 2014 2015* 2016* 2017* 2018* 2019* 2020* Revenue/Spendinginbillionpounds Revenue Spending Total UK Government Spending and Tax Revenue 34
- 12. A Level Economics – Year 1 (AS) Revision Workshop Fiscal Policy can either be contractionary or expansionary: AD Expansionary • Decrease Direct tax • Decrease Indirect Tax • Increase Government borrowing Contractionary • Increase Direct tax • Increase Indirect Tax • Decrease Government borrowing AD 35
- 13. A Level Economics – Year 1 (AS) Revision Workshop Fiscal Policy Suggestion ‘Depends on’ factor Reduce Unemployment Reduce Inflation Sustainable increase in economic growth Reduce Current Account Deficit Choose an appropriate fiscal policy needed for each objective and suggest a ‘depends on’ factor that can influence the success of the policy: Increase spending on basic skill training Increase income tax to reduce spending Use taxation to redistribute income Having knowledge of skills needs of employers in the near future How concerning is current rate of unemployment? Ensuring redistribution does not reduce enterprise incentive 35 Reduce indirect taxation to make UK products more competitive Changes in exchange rate
- 14. A Level Economics – Year 1 (AS) Revision Workshop Income plus cash benefits by quintile groups for ALL households, 2000 and 2014 35 Calculate the missing numbers in the yellow boxes above. In each case, you are attempting to find a percentage figure which shows what proportion of total income is represented by cash benefits. 68% 57% 2% 4%
- 15. A Level Economics – Year 1 (AS) Revision Workshop Evaluation: Will the change in the way that income is distributed between 2000 and 2014 lead to an increase in aggregate demand? Argument for Point Explanation Evidence Evaluation Link back Lower income groups relying less on benefits If relying less on benefits, yet overall income is rising, suggests that people are working more and could be spending more Lowest quintile has 57% of income in benefits in 2014 compared to 68% in 2000. This depends on whether the total income in 2014 reflects a real increase in income Reduced dependency on benefits and higher proportion of employed hours suggests higher incomes and therefore higher AD due to more consumption spending 36
- 16. A Level Economics – Year 1 (AS) Revision Workshop Evaluation: Will the change in the way that income is distributed between 2000 and 2014 lead to an increase in aggregate demand? Argument against Point Explanation Evidence Evaluation Link back Data suggests only a marginal change in the re-distribution of income With marginal changes in re-distribution there is no evidence that AD will alter When calculating averages compared to ‘overall’ the lowest fifth only increased by 4 % points (29% of avg in 2000, 33% of avg in 2014) This data could indicate that the lowest quintiles have a slightly higher income which is more likely to be spent than saved compared to higher quintiles The data illustrates a small +‘ve change in benefits but a greater –’ve change in income distribution so may not show much change in AD. 36
- 17. A Level Economics – Year 1 (AS) Revision Workshop The Impact of Quantitative Easing Quantitative Easing (QE), as Monetary Policy, was tried in 2009, 2011 and 2012. We can now start to evaluate the impact it had on the economy. 36
- 18. £ assets assets assets assets assets % BoE ‘creates’ money This is used to purchase assets – mainly government bonds Lower yields on assets leads to lower interest rates yield yield yield yield yield Increased demand increases price of bonds and lowers their yield Lower interest rates encourages greater borrowing This should stimulate the economy Bond costs £100, with a yield of 10% 10% of £100 = £10 Bond increases in value to £110 £10 as percentage of £110 = 9.1% Why? If yield percentage is lower, financial institutions less likely to buy bonds They can make more money from loaning out their funds But will have to reduce interest rate to attract custom How does QE work?
- 19. A Level Economics – Year 1 (AS) Revision Workshop Evaluation The impact is meant to be both short and longer term. There are what are called an ‘impact phase’ (the phase when the QE process is in place) and then the ‘adjustment’ phase – where the impact of QE continues to influence aspects of economic performance. 37
- 20. A Level Economics – Year 1 (AS) Revision Workshop What impact has QE actually had? • Between March 2009 and March 2013, the CPI increased from 109.8 to 125.6, suggesting that QE had a positive impact on increasing prices during a period of economic difficulties • However, during the same 4 year period, economic growth was only 3.7%. • During this period, real wages also decreased by an average of 8% • Many pensions, relying on the interest payments on investments such as bonds also saw reduced yields. 37
- 21. A Level Economics – Year 1 (AS) Revision Workshop Evaluate the view that Quantitative Easing, as a Monetary Policy, has had no positive impact on the UK economy between 2009 and 2015. Argument for Point Explanation Evidence Evaluation Link back QE has led to worse inequality in UK QE has only helped to prop up the stock markets, which only benefits owners of assets who are mainly in the higher income groups Standard and Poor report in Feb 2016 suggests value of financial assets has risen by £600bn whilst average real wage fell by 8% However, without the introduction of QE growth could have been worse during the period with a negative impact on all income groups QE does not appear to have had a positive impact on the economy as it has contributed to increasing inequality. 37
- 22. A Level Economics – Year 1 (AS) Revision Workshop Evaluate the view that Quantitative Easing, as a Monetary Policy, has had no positive impact on the UK economy between 2009 and 2015. Argument against Point Explanation Evidence Evaluation Link back QE had higher impact compared to a further change in interest rates As a monetary policy, QE had more influence on the economy than a change in what was already an historically low level of interest rates Interest rates have remained at 0.5% since March 2009 giving little scope to reduce them further Whilst QE has more impact than interest rate changes, it is difficult to measure the extent of it’s impact – we do no know what would have happened without it The economy has grown over the period of 2009 to 2012, so QE appears to have more impact than a further change in interest rates 37
- 23. A Level Economics – Year 1 (AS) Revision Workshop An alternative? Professor Steve Keen (from Kingston University) argues that the single biggest issue that causes deflation and depression in the economy is the overly-large debt to GDP level. He argues for a different kind of QE that he calls ’The People’s QE’ 37
- 24. A Level Economics – Year 1 (AS) Revision Workshop 37
- 25. A Level Economics – Year 1 (AS) Revision Workshop Whatever happened to ‘Forward Guidance’? Introduced by Mark Carney when he was first appointed as Governor of the Bank of England in 2013 ‘Pre-warn’ people about possible interest changes Individuals and firms could plan to adjust when changes were made. Carney said that there would be no changes to interest rates whilst unemployment remained above 7%. Unemployment dropped to this level within 6 months of his appointment. Strategy altered -there would be no change to interest rates whilst a range of measures (such as the output gap) were above set levels. 38
- 26. A Level Economics – Year 1 (AS) Revision Workshop Whatever happened to ‘Forward Guidance’? 38 Advantages of Forward Guidance Impact of changes to Forward Guidance If banks can see BoE forward policy they are more likely to alter their own interest rates in short run to match base rate. It gives guidance about expected inflation levels so can influence short term spending. Policy has less credibility as it changed Has more credibility (!) – now a more sophisticated guidance tool
- 27. A Level Economics – Year 1 (AS) Revision Workshop Balance of UK trade, October 2013 to October 2015 39
- 28. A Level Economics – Year 1 (AS) Revision Workshop Evaluate the view that Monetary Policy in the UK has had a positive impact on the Balance of Trade in the UK since 2013. Argument for Point Explanation Evidence Evaluation Link back During the period the balance of trade in services has increased Expansionary monetary policies have supported exports from UK’s most successful sectors of finance and insurance During the period balance of trade in services increased from between approximately £6.5bn to around £7bn However, overall trade in goods fluctuated much more, and has not improved Monetary policy may have had a positive impact on the balance of trade in services, but not on the overall balance of trade. 39
- 29. A Level Economics – Year 1 (AS) Revision Workshop Evaluate the view that Monetary Policy in the UK has had a positive impact on the Balance of Trade in the UK since 2013. Argument against Point Explanation Evidence Evaluation Link back There is no evidence that monetary policy has improved the balance of trade Balance of trade has remained consistent over the period, with a surplus for services and a deficit for goods Between 2013 and 2015, services remained a positive number (between approx. £6.5 and £7bn) and goods a negative number (between approx. £12 and £13bn) However, as Sterling has strengthened due to the Euro’s weakness, consistent policies may at least have prevented a level of deficit that could have been worse. The Balance of Trade has remained steadfastly negative, suggesting that any monetary policy has had little impact. 39
- 30. A Level Economics – Year 1 (AS) Revision Workshop Extension activities 41