2.6 Macroeconomic Objectives Flashcards
What are the 4 main macroeconomic objectives?
- Economic Growth
- Low Unemployment
- Low and stable inflation (2% from CPI)
- Balance of Payments equilibrium on the current account
What are demand-side policies? What are the 2 types?
- Designed to manipulate consumer demand
- Expansionary: Increase AD and bring about growth
- Deflationary: Reduce AD and control inflation
What is monetary policy? What are the 2 ways?
- The central bank attempts to control AD by altering base interest rates of the amount of money in the economy (MPC)
- Interest Rates
- Quantitative easing
What are the 2 aims of monetary policy?
- Low and stable inflation (2%)
- Stable economic growth and low unemployment
Who sets the base interest rate?
- The bank on England
What are the 4 key mechanisms for interest rates causing a fall in AD?
- Increased cost of borrowing
- Increased saving
- Less consumer and producer confidence (to borrow and spend)
- Incentive to hold money in British banks (causing improved exchange rate of pound)
What are the 5 problems with using interest rate (of monetary policy)?
- Balance of trade Deficit (if pound becomes too strong SPICED)
- Interest rate effect lag (takes up to 2 years to take effect)
- Ineffective if there is lack of confidence (consumers wont borrow or banks wont lend)
- Interest rates may already be too low
- High interest rates for too long can discourage investment (therefore decreasing LRAS)
What is Quantitative Easing? What can it prevent?
- When the Bank of England buys assets in exchange for money (to reduce money supply)
- Can prevent liquidity trap (when interest rates are low, but saving is still high)
What are the 3 effects of quantitative easing for increasing AD?
- Increases value of assets (positive wealth effect) (e.g., housing)
- Increases money supply (therefore more spending and investment)
- Commercial banks may lower interest rates (as they have more money from the bank of england)
What are the 4 problems with quantitative easing?
- Could cause hyper-inflation
- Could lead to price increases of second-hand goods (which does not increase AD)
- No guarantee of wealth effect increasing consumption
- Large effect on housing market prices (effect geographical mobility)
What is Fiscal policy?
- Government spending and taxation to increase AD
What are the 2 main ways of fiscal policy?
- Increase in income and corporation tax
- Rise in government spending (G)
What is a Government budget deficit and surplus?
- Budget Deficit: Spend more than they receive (from Tax)
- Budget Surplus: Receive more than they spend (from tax)
What are the 2 types of taxation for fiscal policy?
- Indirect (taxes on expenditure)
- Direct (taxes from income, student loans)
What are the 3 problems with Fiscal Policy?
- Impacts LRAS (e.g., lower spending means worse quality public goods)
- Inequality (higher taxes impact lower incomes more - regressive)
- Fiscal policy dependent on the multiplier
What are the 4 problems with Demand-Side policies?
- No effect on Long-Run output (only inflationary)
- Effect depends on where the economy is operating at on Keynesian LRAS
- Time lags (with both monetary and fiscal policy)
- Expansionary policies bring inflation, deflationary policies bring unemployment
(BIGGEST ISSUE)
What is the difference between fiscal and monetary policy?
- Monetary policy increasing demand without affecting spending
- Fiscal policy impacts the supply-side of the economy (e.g., more spending on education to shift LRAS)
What are Supply-side policies? What are the 2 types?
- Policies aimed at increasing productive potential (LRAS shift)
- Market-based: Policies that encourage competition, market reform, and create incentives
- Interventionist Policies: Government intervention to correct market failure (e.g., spending on education and transport)
What are the 5 Supply-side policies?
- Increasing incentives (e.g., to work, which increase work force)
- Promoting Competition
- Reforming the Labour Market
- Improving skills and quality of labor force
- Improving infrastructure
What are the 4 main conflicts between Objectives?
- Economic Growth vs Protection of Environment
- Economic growth vs Balance of payments
- Unemployment vs Inflation
- Economic growth and unemployment
What are the 2 Conflicts between monetary policies?
- Expansionary increases AD, but increases inflation
- Deflationary decreases AD and improves inflation, but worsens employment and growth
What are the 3 conflicts for interest rates?
- Lowers inflation, but damages long-term investment
- Increased value of pound, but worsens balance of payments
- Low interest rates can worsen equality
What is the conflict of Supply-side Policies?
- Can increase AS (and long-term economic growth), but can increase inflation in the short-run
What are the 3 conflicts with Fiscal Deficits?
- Can reduce Goverment Spending and increase taxes, but reduces short-term growth and increases unemployment
- Output is reduced, but then so it Tax revenues
- Affects income equality (the poor rely on government provisions)
