2.6 Macroeconomic Objectives Flashcards
Name the 7 macroeconomic objectives
Balance of payment equilibrium
Economic growth
Low unemployment
Low and stable inflation
Balanced budget, Environment, Greater income equality
How does economic growth aims differ in developing vs developed countries?
Developing focus on development over growth
What is the ideal unemployment rate
Ideally under 2%
UK inflation target and why
2%, stability for customers and firms
Name 3 instruments of monetary policy
Interest rates
Money supply
Exchange rate
How do interest rates effect inflation
Inverse relationship - increasing rates reduces inflation and vice versa
Define the face value of a bond
amount that will be received when bond matures
Define the maturity date of a bond
Date on which government will repay bondholder e.g. 2, 5 or 10 years
Define the coupon value and coupon date of a bond
Amount of interest that will be paid and when the interest will be paid
Define the yield of a bond
Interest as a % of market price
Define a bond
A way for the government to borrow by taking a ‘loan’ from a consumer/firm
Formula for yield of a bond
coupon value / face value
What is quantitative easing
The central bank buying bonds to push up their prices and bring down long-term interest rates, therefore stimulating spending
Name 3 ways QE impacts AD
- Those who sell bonds have more funds for investment
- Long Term interest rates fall, so interest rates tend to fall, increasing spending
- Weaker currency due to lower domestic interest rates (due to hot money outflow) so trade balance improves
How does QE help banks
Increases liquidity and lending so spending can increase
Why was QE so important after the financial crisis in 2008?
Interest rates too low so QE was used - bough bonds from financial institutions - this gave banks liquidity and money supply was increased which increased AD
Name 3 arguments in favour of QE
• Central bank need additional policy instrument when interest rate cuts aren’t stimulating AD
• Stop fall in real GDP and onset of deep depression / even lower unemployment
• Lower long term interest rates have kept business confidence higher
Name 3 risks of QE
- Risky as could cause hyperinflation
- No guarantee higher asset prices lead into higher consumption – confidence could still remain low
- Concerns banks can become reliant on it when it is not meant to be permenant
Name 6 considerations when setting interest rates
- GDP growth and spare capacity
- Bank lending and retail sales
- Share prices and house prices
- Consumer and business confidence
- International data
- Commodity market prices
Name 3 advantages of demand side monetary policy
• Interest rates have powerful effect on C
• Bank of England is independent from government • Interest rates can be adjusted monthly
Name 3 disadvantages of demand side monetary policy
• Time lag – 18 – 24 months
• Money supply difficult to control
• Different parts of the economy might need a different approach e.g. services
booming, and manufacturing failing
Name the 2 biggest sources of gov revenue
Income tax and VAT
Define direct and indirect taxation
• Direct = cannot be passed on to others
• Indirect = can be passed on (in part) to consumers in higher prices
Name 2 examples each of direct and indirect taxes
Direct: income, corporation
Indirect: excise duty, VAT
Name 3 advantages of demand side fiscal policy
• Can compensate for a fall in C and boost AD
• Capital spending can improve LRAS as well as AD
• Can achieve other objectives such as improving equality
Name 3 disadvantages of demand side fiscal policy
• Can be inflationary
• Can affect stability if it gets out of control
• Can lead to ‘crowding out’ of private investment
What 3 things caused the Great depression in the 1930s
Stock market crash after loose monetary policy, tariff war, membership of Gold Standard which fixed exchange rates
Name 2 responses used to the financial crisis
Expansionary monetary policy (QE in Jan 2010 £200bn)
Nationalised banks (e.g Northern Rock)
What did interest rates fall from/to from Apr 2008-Mar 2009?
5% to 0.5%
How would classical vs Keynesian economists evaluate demand side policy generally?
• Classical economists – no effect on LR output so favour supply side policy
• Keynesian economists – impact depends where economy is on LRAS
Name 4 popular supply side policies
Spending on health
Soending on education
Spending on infrastructure
Investment in capital
Define market-based and interventionist supply side policy and give 3 examples each
Market-based = removing government intervention/regulation to encourage private businesses : Privatisation, deregulation, reducing tax
Interventionist = increasing government regulation/intervention to improve outcomes : Increasing spending on public services, nationalisation, increased benefits
Define production
:Value of output of goods and services
Define productivity
• A measure of the efficiency of factors of production
Name 3 drawbacks of supply side policy
- Verycostly–opportunitycost
- Time lags
- Difficult to measure benefits
Name 5 conflicts in macroeconomic objectives
- Economic growth and inflation
- Economic growth and environment
- Economic growth and inequality
- Economic growth and government budget
- Unemployment and inflation (phillips curve)
