2.6 Introduction to Macroeconomic Policy Flashcards
What is macroeconomic policy
An aim to control the level of activity in the economy so that the standard of living improves and stability is maintained.
What are the 4 main macroeconomic objectives
- Low, stable rate of inflation (2.0% target)
- Low levels of unemployment
- Sustainable economic growth
- positive balance of payments (more exports than imports)
Why do the government want sustainable economic growth
GDP is growing to improve living standards but not too high in order to avoid high inflation
Why do the government want low unemployment
Maximise income, output and spending. More efficient and less poverty
Why do the government want a low and stable rate of inflation
Stable in order to keep the economy’s GDP growing but not too high to cause a recession
Why do the government want an equilibrium of their current account
More exports over imports means less deficit and more spending
What are the 3 ways the government try to achieve their objectives?
- Fiscal
- Monetary
- Supply-side
What are contractionary and expansionary policies used for. Give examples
Contract is to reduce sending and the overheating inflation of a boom (e.g. higher interest rates, tax increases, lower gov spending)
Expand is to increase spending and to increase the low levels of inflation and employment (e.g. Lower interest, tax cuts, gov spending)
What is fiscal policy
Involves changes in the levels of taxation or government spending to influence economic activity
What is a public sector deficit
When gov spending exceeds gov income and they borrow money to fund the difference
Explain the chain reaction of expansionary fiscal policy and how this is different to contractionary
- Taxation is reduced / gov spending increased
- Lower tax, more disposable income
- Gov spending increases, more employment (education)
- More consumption
- More output
- More exports
AD has increased - economy has grown
Contractionary does the exact opposite
What is monetary policy
Uses interest rates to vary the costs of borrowing and saving (borrowers are affected more than savers). Changes are made to the base rate.
Explain the chain reaction of expansionary monetary policy and how this is different to contractionary
- The base rate is reduced
- The cost of borrowing for business/consumers falls
- Consumption and investment rise
- More demand
- More output
- Unemployment falls as output increases
AD has increased - economy has grown
Contractionary does the exact opposite
What are supply-side policies
All measures designed to increase the productive capacity of the economy by influencing AS.
What are the supply-side policies - how do they work
Taxes - Reduction in taxes means more incentive to work.
Benefits - Cuts in benefits almost forces people to work
Education and training - More skill and efficiency
Grants and subsidies - Develops innovation and efficient tech
Privatisation - More competition means more efficiency
Supply side focuses on increases employment/output and efficiency when producing this output.
