2.6. Macroeconomic Objectives

Question 1

what are the seven possible macro objectives

Answer 1

economic growth
low unemployment
low and stable inflation
balance of payment equilibrium on the current account
balance on gov budget
protection of environment
greater income equality

Question 2

what is a demand side policy

Answer 2

Expansionary policy is aimed at increasing AD to bring about growth, whilst deflationary policy attempts to decrease AD to control inflation

Question 3

what is monetary policy

Answer 3

where the central bank or regulatory authority attempts to control the level of AD by altering base interest rates or the amount of money in the economy

Question 4

what is fiscal policy

Answer 4

is use of borrowing, government spending and taxation to manipulate the level of aggregate demand and improve macroeconomic performance.

Question 5

what are the four ways in which a rise in interest rates leads to a fall in AD

Answer 5

rise in interest rates means an increase in cost of borrowing
saving becomes more attractive
less spending
fall in AD
prices drop on stocks, shares, houses and other assets
consumers go through negative wealth
interest rates fall
means consumer and producer confidence falls
low investment and consumption which are components of AD
people in debt (mortgages) will have to pay more back so don’t spend as much
people save more into British banks as they gain higher rate of return
so the pound will be in high demand
a stronger pound

Question 6

what are the two ways monetary policy can effect AD

Answer 6

quantitative easing and interest rates

Question 7

what are the problems with interest rates

Answer 7

rate of exports fall and imports rise leading to trade deficit
takes 2 years to have full effect
interest rates may already be low
not all interest rates are affected by the BOE base rate
lack of confidence in the country may mean low interest rates don’t effect AD much
over long time if there high interest rates it may discourage investment leading to decrease in LRAS

Question 8

what is QE

Answer 8

when the Bank of England buys assets in exchange for money in order to increase
money supply and get money moving around the economy. It can prevent the liquidity trap, where even low interest rates cannot stimulate AD

Question 9

how can QE stimulate demand

Answer 9

since banks buy assets prices for them rise
positive wealth effect
the money supply increases
Commercial banks may lower their interest rates as they are receiving so much money from the Bank of England and so can offer very low interest deals to their customers
price of money falls
encourage borrowing, and therefore
increase investment and consumption so increase AD

Question 10

problems of QE

Answer 10

very risky and could cause hyperinflation
no guarantee that higher asset prices lead into higher consumption through the wealth effect, especially if confidence remains low
rising share prices which means inequality since the rich grow richer whilst the poor see none of the gains

Question 11

what are the monetary policy committees main aim

Answer 11

keep inflation at 2%
made up of nine members

Question 12

what are the two main ways fiscal policy can be introduced

Answer 12

tax and gov spending

Question 13

how does the gov budget effect AD

Answer 13

if gov spending is high then AD will increase as its a component of AD

Question 14

what’s a direct tax

Answer 14

paid directly to the government by the individual taxpayer

Question 15

what’s an indirect tax

Answer 15

where the person charged with paying the money to the government is able to pass on the cost to someone else i.e. the supplier can pass on the burden to indirect tax to the
consumer

Question 16

what are the four highest raising tax revenues for the gov

Answer 16

income tax, national insurance, VAT and corporation tax

Question 17

what are the problems with fiscal policy

Answer 17

gov spending effects LRAS
taxes effect equality
the gov may not want to raise taxes as it would mean they may not get voted back in
depends how big the multiplier is

Question 18

what are supply side policies

Answer 18

increasing the productive potential of the economy

Question 19

what is a market based policy

Answer 19

remove anything that prevents the free market system working efficiently. these barriers include those which reduce willingness of workers to take jobs or lead to inefficient production, high prices or a lack of risk-taking.

Question 20

what are interventionist policies

Answer 20

policies designed to correct market failure, for example the free market under provides education and so the government provides it

Question 21

what are the supply side policies

Answer 21

increase incentive
promote competition
reform labour market
quality of labour force
infrastructure

Question 22

how can governments increase incentives to improve output

Answer 22

reduction in benefits
reduction in minimum wage would make firms want to employ a lower costs
decrease in taxes when employing people
lower taxes means workers see more of the money they earn

Question 23

on the other hand how can increasing incentives have a negative impacts

Answer 23

a small change in any tax, for example from 25% to 20%, will have little impact on people’s incentive to work. Reductions of tax on high income earners will lead to more income inequality and any reduction will mean governments have less revenue so have to decrease spending or borrow more. Reducing benefits will also worsen equality.

Question 24

how could the government promote competition to increase output

Answer 24

By deregulating or privatising the public sector, firms can compete in a competitive market, which should also help improve economic efficiency

However, deregulation and privatisation may lead to a poorer quality service

Question 25

how can governments reform the labour force to increase output

Answer 25

increasing the retirement age
as trade unions increase wages the prevention of these would increase output as laying off some workers and reducing production wouldn’t happen
reduction of benefits will also increase incentive to work

Question 26

on the other hand how can increasing incentives have a negative impacts

Answer 26

trade unions are already very weak in the UK so reducing their power further may have little effect. Similarly, reducing benefits will lower AD if these people are unable to get jobs and this will cause a further fall in employment. The
reduction in benefits is likely to have a multiplied effect as the poor have a very high MPC and so a reduction in their income will cause a large fall in spending, meaning
AD falls by a lot. It may also mean there is increased income inequality. Making the labour force more flexible will lead to decreased quality of life as people are less
secure in their jobs and may have to work odd hours. It will also mean some people receive very low pay, which will increase income inequality and may reduce AD.

Question 27

how can Improving skills and the quality of the labour force effect output

Answer 27

increase spending on education and training
increase in high skilled migrants
improvements in skills will mean that workers are more efficient

Question 28

how can Improving infrastructure effect output

Answer 28

tax incentives or subsidies on investment
government could spend money to improve infrastructure
new technology will developed so more efficient so less resources are needed to produce the same amount of goods

Question 29

how does a growing economy effect inflation

Answer 29

A growing economy is likely to experience inflationary pressures on the average price level. This is especially true when there is a positive output gap and AD
increases faster than AS.

Question 30

how does a growing economy effect gov budget deficit

Answer 30

Reducing a budget deficit requires less expenditure and more tax revenue. This would lead to a fall in AD, however, and as a result there will be less economic growth

Question 31

how does a growing economy effect current account

Answer 31

During periods of economic growth, consumers have high levels of spending. In the UK, consumers have a high marginal propensity to import, so there is likely to be more spending on imports. This leads to a worsening of the current account deficit

Question 32

how does a growing economy effect environment

Answer 32

High rates of economic growth are likely to result in high levels of negative externalities, such as pollution and the usage of non-renewable resources. This is because of more manufacturing, which is associated with higher levels of carbon dioxide emissions.

Question 33

how does a growing unemployment effect inflation

Answer 33

In the short run, there is a trade-off between the level of unemployment and the inflation rate

As economic growth increases, unemployment falls due to more jobs being created

However, this causes wages to increase, which can lead to more consumer spending
and an increase in the average price level.

Question 34

how does interest rates effect inequality

Answer 34

The low interest rate could affect the distribution of income. Savers only receive a small return on their savings.

Question 35

how does a monetary policy effect fiscal policy

Answer 35

Expansionary fiscal policies involve more government borrowing, which could cause interest rates and the inflation rate to rise.

Question 36

how does the environment effect competitiveness

Answer 36

If ‘green taxes’ are implemented, such as carbon taxes, or if there are minimum
prices on pollution permits, the competitiveness of domestic firms could be
compromised. This is because they are limited in their production