2.6. Macroeconomic Objectives Flashcards
what are the seven possible macro objectives
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
what is a demand side policy
Expansionary policy is aimed at increasing AD to bring about growth, whilst deflationary policy attempts to decrease AD to control inflation
what is monetary policy
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
what is fiscal policy
is use of borrowing, government spending and taxation to manipulate the level of aggregate demand and improve macroeconomic performance.
what are the four ways in which a rise in interest rates leads to a fall in AD
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
what are the two ways monetary policy can effect AD
quantitative easing and interest rates
what are the problems with interest rates
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
what is QE
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
how can QE stimulate demand
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
problems of QE
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
what are the monetary policy committees main aim
keep inflation at 2%
made up of nine members
what are the two main ways fiscal policy can be introduced
tax and gov spending
how does the gov budget effect AD
if gov spending is high then AD will increase as its a component of AD
what’s a direct tax
paid directly to the government by the individual taxpayer
what’s an indirect tax
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
what are the four highest raising tax revenues for the gov
income tax, national insurance, VAT and corporation tax
what are the problems with fiscal policy
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
what are supply side policies
increasing the productive potential of the economy
what is a market based policy
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.
what are interventionist policies
policies designed to correct market failure, for example the free market under provides education and so the government provides it
what are the supply side policies
increase incentive
promote competition
reform labour market
quality of labour force
infrastructure
how can governments increase incentives to improve output
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
on the other hand how can increasing incentives have a negative impacts
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.
how could the government promote competition to increase output
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
how can governments reform the labour force to increase output
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
on the other hand how can increasing incentives have a negative impacts
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.
how can Improving skills and the quality of the labour force effect output
increase spending on education and training
increase in high skilled migrants
improvements in skills will mean that workers are more efficient
how can Improving infrastructure effect output
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
how does a growing economy effect inflation
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.
how does a growing economy effect gov budget deficit
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
how does a growing economy effect current account
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
how does a growing economy effect environment
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.
how does a growing unemployment effect inflation
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.
how does interest rates effect inequality
The low interest rate could affect the distribution of income. Savers only receive a small return on their savings.
how does a monetary policy effect fiscal policy
Expansionary fiscal policies involve more government borrowing, which could cause interest rates and the inflation rate to rise.
how does the environment effect competitiveness
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
