Macro Chapter 4

A tool or set of tools used to try and achieve a policy objective

The central bank in the UK economy which is in charge of monetary policy

Controls the banking system and implements monetary policy on behalf of the government

An asset that can be used as a medium of exchange; it is used to buy things

The CPI inflation rate target set by the government for the Bank of England to try to achieve. The target is currently 2%

Nine economists, chaired by the governor of the Bank of England, who meet once a month to set Bank Rate, the Bank of England's key interest rate, and also decide whether aspects of monetary policy need changing.

The rate of interest the Bank of England pays to commercial banks on their deposits held at the Bank of England

Measures the ease with which assets can be turned into cash quickly without a loss in value. Cash is the most liquid of all assets

The stock of money in the economy, made up of cash and bank deposits

Uses higher interest rates to decrease aggregate demand and shift the AD curve to the left

The price of a currency, e.g the pound, measured in terms of another currency such as the US dollar or the euro.

Uses lower interest rates to increase aggregate demand and shift the AD curve to the right

Involves the use of taxation, public spending and the government's budgetary position to achieve the government's policy objectives

Occurs when government spending exceeds government revenue (G>T). The represents a net injection of demand into the circular flow of income and hence a budget deficit is expansionary.

Achieved when government spending equals government revenue (G=T)

Occurs when government spending is less than government revenue (G

Borrowing by the government and other parts of the public sector to finance a budget deficit

Used to increase or decrease the level of aggregate demand (and to shift the AD curve right or left) through changes in government spending, taxation and the budget balance.

Deliberately running a budget deficit and borrowing to finance the deficit.

Uses fiscal policy to increase aggregate demand and shift the AD curve to the right

Uses fiscal policy to decrease aggregate demand and to shift the AD curve to the left

Involves making discrete changes to G, T and the budget deficit to manage the level of aggregate demand

A situation in which an increase in government or public sector spending displaces private sector spending, with little or no increase in aggregate demand

Sovereign debt is the part of the national debt owned by people or institutions outside the country that has sold the debt to them. The sovereign debt problem stems from the difficulties governments face when trying to finance budget deficits by borrowing on international financial markets.

Used to increase the economy's ability to produce and supply goods, through creating incentives to work, save, invest, and be entrepreneurial. Interventionist supply-side fiscal policies, such as the financing of retraining schemes for unemployed workers, are also designed to improve supply-side performance.

The stock of all past central government borrowing that has not been paid back

The part of the budget deficit which rises in the downswing of the economic cycle and falls in the upswing of the cycle.

If the structural deficit were zero, a cyclical surplus would probably emerge in the upswing of the economic cycle

The part of the budget deficit which is not affected by the economic cycle but results from structural change in the economy affecting the government's finances, and also from long-term government policy decisions.

As income rises, a larger proportion of income is paid in tax.

A criterion used for judging whether a tax is good or bad. Also known as a canon of taxation.

The principle of taxation which requires a tax to be cheap to collect in relation to the revenue it yields

The principle of taxation which requires a tax to be convenient for taxpayers to pay.

One of the principles of taxation. Tax payers should be reasonably certain of the amount of tax they will be expected to pay.

Requires a tax to be fair

A tax should achieve its desires objective(s) with minimum unintended consequences.

The principle of taxation that requires a tax to be easy to change to meet new circumstances.

As income rises, a smaller proportion of the income is paid to the government in tax

When the proportion of income paid in tax stays the same as income increases.

The basic tax threshold is the level of income above which people pay income tax. Income below the basic threshold is untaxed.

A tax which cannot be shifted by the person legally liable to pay the tax onto someone else. Direct taxes levied on income and wealth.

A tax which can be shifted by the person legally liable to pay the tax onto someone else. For example, through raising the price of a good being sold by the taxpayer. Indirect taxes are levied on spending.

A branch of free-market economics arguing that government policy should be used to improve the competitiveness and efficiency of markets and, through this, the performance of the economy.

Occur when the government intervenes in, and sometimes replaces, free markets. Interventionist supply-side policies include government funding of research and development.

Free up markets, promote competition and greater efficiency, and reduce the economic role the state.

Involves shifting ownership of state-owned assets to the private sector.

Involves shifting provision of goods or services from the non-market sector to the market sector. Also known as commercialisation.

Involves removing previously imposed regulations. It is the opposite of regulation.

Reforms undertaken by the private sector to reduce costs to enable firms to become more productively efficient and competitive. Supply-side improvement often results from more investment and innovation, often undertaken by firms without prompting from the government.