2.6 Macroeconomic Objectives

Question 1

Name the 7 macroeconomic objectives

Answer 1

Balance of payment equilibrium

Economic growth

Low unemployment

Low and stable inflation

Balanced budget, Environment, Greater income equality

Question 2

How does economic growth aims differ in developing vs developed countries?

Answer 2

Developing focus on development over growth

Question 3

What is the ideal unemployment rate

Answer 3

Ideally under 2%

Question 4

UK inflation target and why

Answer 4

2%, stability for customers and firms

Question 5

Name 3 instruments of monetary policy

Answer 5

Interest rates

Money supply

Exchange rate

Question 6

How do interest rates effect inflation

Answer 6

Inverse relationship - increasing rates reduces inflation and vice versa

Question 7

Define the face value of a bond

Answer 7

amount that will be received when bond matures

Question 8

Define the maturity date of a bond

Answer 8

Date on which government will repay bondholder e.g. 2, 5 or 10 years

Question 9

Define the coupon value and coupon date of a bond

Answer 9

Amount of interest that will be paid and when the interest will be paid

Question 10

Define the yield of a bond

Answer 10

Interest as a % of market price

Question 11

Define a bond

Answer 11

A way for the government to borrow by taking a ‘loan’ from a consumer/firm

Question 12

Formula for yield of a bond

Answer 12

coupon value / face value

Question 13

What is quantitative easing

Answer 13

The central bank buying bonds to push up their prices and bring down long-term interest rates, therefore stimulating spending

Question 14

Name 3 ways QE impacts AD

Answer 14

• 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

Question 15

How does QE help banks

Answer 15

Increases liquidity and lending so spending can increase

Question 16

Why was QE so important after the financial crisis in 2008?

Answer 16

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

Question 17

Name 3 arguments in favour of QE

Answer 17

• 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

Question 18

Name 3 risks of QE

Answer 18

1. Risky as could cause hyperinflation
2. No guarantee higher asset prices lead into higher consumption – confidence could still remain low
3. Concerns banks can become reliant on it when it is not meant to be permenant

Question 19

Name 6 considerations when setting interest rates

Answer 19

• GDP growth and spare capacity
• Bank lending and retail sales
• Share prices and house prices
• Consumer and business confidence
• International data
• Commodity market prices

Question 20

Name 3 advantages of demand side monetary policy

Answer 20

• Interest rates have powerful effect on C
• Bank of England is independent from government • Interest rates can be adjusted monthly

Question 21

Name 3 disadvantages of demand side monetary policy

Answer 21

• 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

Question 22

Name the 2 biggest sources of gov revenue

Answer 22

Income tax and VAT

Question 23

Define direct and indirect taxation

Answer 23

• Direct = cannot be passed on to others
• Indirect = can be passed on (in part) to consumers in higher prices

Question 24

Name 2 examples each of direct and indirect taxes

Answer 24

Direct: income, corporation

Indirect: excise duty, VAT

Question 25

Name 3 advantages of demand side fiscal policy

Answer 25

• 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

Question 26

Name 3 disadvantages of demand side fiscal policy

Answer 26

• Can be inflationary
• Can affect stability if it gets out of control
• Can lead to ‘crowding out’ of private investment

Question 27

What 3 things caused the Great depression in the 1930s

Answer 27

Stock market crash after loose monetary policy, tariff war, membership of Gold Standard which fixed exchange rates

Question 28

Name 2 responses used to the financial crisis

Answer 28

Expansionary monetary policy (QE in Jan 2010 £200bn)

Nationalised banks (e.g Northern Rock)

Question 29

What did interest rates fall from/to from Apr 2008-Mar 2009?

Answer 29

5% to 0.5%

Question 30

How would classical vs Keynesian economists evaluate demand side policy generally?

Answer 30

• Classical economists – no effect on LR output so favour supply side policy
• Keynesian economists – impact depends where economy is on LRAS

Question 31

Name 4 popular supply side policies

Answer 31

Spending on health
Soending on education
Spending on infrastructure
Investment in capital

Question 32

Define market-based and interventionist supply side policy and give 3 examples each

Answer 32

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

Question 33

Define production

Answer 33

:Value of output of goods and services

Question 34

Define productivity

Answer 34

• A measure of the efficiency of factors of production

Question 35

Name 3 drawbacks of supply side policy

Answer 35

1. Verycostly–opportunitycost
2. Time lags
3. Difficult to measure benefits

Question 36

Name 5 conflicts in macroeconomic objectives

Answer 36

1. Economic growth and inflation
2. Economic growth and environment
3. Economic growth and inequality
4. Economic growth and government budget
5. Unemployment and inflation (phillips curve)