2.6 Macroeconomic Objectives

Question 1

What are the 4 main macroeconomic objectives?

Answer 1

• Economic Growth
• Low Unemployment
• Low and stable inflation (2% from CPI)
• Balance of Payments equilibrium on the current account

Question 2

What are demand-side policies? What are the 2 types?

Answer 2

• Designed to manipulate consumer demand
• Expansionary: Increase AD and bring about growth
• Deflationary: Reduce AD and control inflation

Question 3

What is monetary policy? What are the 2 ways?

Answer 3

• 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

Question 4

What are the 2 aims of monetary policy?

Answer 4

• Low and stable inflation (2%)
• Stable economic growth and low unemployment

Question 5

Who sets the base interest rate?

Answer 5

• The bank on England

Question 6

What are the 4 key mechanisms for interest rates causing a fall in AD?

Answer 6

• 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)

Question 7

What are the 5 problems with using interest rate (of monetary policy)?

Answer 7

• 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)

Question 8

What is Quantitative Easing? What can it prevent?

Answer 8

• 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)

Question 9

What are the 3 effects of quantitative easing for increasing AD?

Answer 9

• 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)

Question 10

What are the 4 problems with quantitative easing?

Answer 10

• 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)

Question 11

What is Fiscal policy?

Answer 11

• Government spending and taxation to increase AD

Question 12

What are the 2 main ways of fiscal policy?

Answer 12

• Increase in income and corporation tax
• Rise in government spending (G)

Question 13

What is a Government budget deficit and surplus?

Answer 13

• Budget Deficit: Spend more than they receive (from Tax)
• Budget Surplus: Receive more than they spend (from tax)

Question 14

What are the 2 types of taxation for fiscal policy?

Answer 14

• Indirect (taxes on expenditure)
• Direct (taxes from income, student loans)

Question 15

What are the 3 problems with Fiscal Policy?

Answer 15

• 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

Question 16

What are the 4 problems with Demand-Side policies?

Answer 16

• 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)

Question 17

What is the difference between fiscal and monetary policy?

Answer 17

• 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)

Question 18

What are Supply-side policies? What are the 2 types?

Answer 18

• 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)

Question 19

What are the 5 Supply-side policies?

Answer 19

• 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

Question 20

What are the 4 main conflicts between Objectives?

Answer 20

• Economic Growth vs Protection of Environment
• Economic growth vs Balance of payments
• Unemployment vs Inflation
• Economic growth and unemployment

Question 21

What are the 2 Conflicts between monetary policies?

Answer 21

• Expansionary increases AD, but increases inflation
• Deflationary decreases AD and improves inflation, but worsens employment and growth

Question 22

What are the 3 conflicts for interest rates?

Answer 22

• Lowers inflation, but damages long-term investment
• Increased value of pound, but worsens balance of payments
• Low interest rates can worsen equality

Question 23

What is the conflict of Supply-side Policies?

Answer 23

• Can increase AS (and long-term economic growth), but can increase inflation in the short-run

Question 24

What are the 3 conflicts with Fiscal Deficits?

Answer 24

• 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)