2-6 Macroeconomic objectives and policies Flashcards
1
Q
What are the governments four main macroeconomic objectives?
A
- Economic growth
- Low unemployment
- Low and stable rate of inflation
- Balance of payments equilibrium on current account
2
Q
What other economic objectives may a government have?
A
- Balanced government budget
- Protection of the environment
- Greater income equality
3
Q
What is monetary policy?
A
- Monetary policy is use by the government to control the money flow of the economy. This is done with interest rates and quantitative easing. This Is conducted by the Bank of England, which is independent from the government.
4
Q
What is fiscal policy?
A
- Fiscal policy uses government spending and revenues from taxation to influence AD. This is conducted by the government.
5
Q
How are interest rates used in monetary policy?
A
- Bank controls the base rate
- As a result of a decrease in the base rate for example,
- Consumption and investment increases due to lower costs of borrowing.
- Saving becomes less attractive as there is a lower rate of return.
- Demand for pound will fall as lower interest rates will reduce the incentive for investors to hold their money in British banks.
6
Q
How is Quantitative Easing used in monetary policy?
A
- The bank buys assets in the form of government bonds using the money they have created.
- This is then used to buy bonds from investors, which increases the amount of cash flowing in the financial system.
- This encourages more lending to firms and individuals, since it makes the cost of borriwng lower.
- The theory is that this encourages more investment, and spending so more growth.
7
Q
What are the limitations of monetary policy?
A
- Banks might not pass on the base rate to consumers.
- Even if the cost of borrowing is low, consumers might not be able to borrow if banks are unwilling to lend.
- If consumer’s lack confidence in the economy they are still less likely to spend.
8
Q
When does a government have a budget deficit?
A
- When expenditure exceeds tax revenue
9
Q
When does a government have a budget surplus?
A
- When tax revenue exceed expenditure.
10
Q
What are direct taxes?
A
- Imposed on income and are paid directly to the government from the taxpayer, e.g., income tax.
11
Q
What are indirect taxes?
A
- Imposed on expenditure on goods and services.
12
Q
What are the limitations of fiscal policy?
A
- Imperfect information.
- Time lag
- Debt
13
Q
What were the causes of the great depression?
A
- Set off by wall street crash of 1929
- Led to loss in consumer and business confidence.
- USA had introduced protectionism; UK was committed to the gold standard.
14
Q
What were the responses to the great depression in the UK?
A
- Balancing the budget
- High interest rates
- Eventually left gold standard and cut interest rates.
15
Q
What were the responses to the great depression in the USA?
A
- Public sector investment
- Not enough spending
- Increased money supply
