2.6 Macroeconomic objectives Flashcards
What are the 7 macroeconomic objectives
- Economic growth
- Inflation
- Balance of payments stability
- Income equality
- Sustainable economic spending
- Economic sustainability
- Full employment
What is monetary policy
Aims to promote economic growth through interest rates and quantitative easing
What is fiscal policy
Aims to promote economic growth through taxation and government spending
Who is in charge of monetary policy
The bank of England
Who is in charge of fiscal policy
The Government
What is contractionary policy (monetary)
Used to reduce inflation and slow down economic activity
How is contractionary policy conducted (interest rates)
Higher interest rates → Less borrowing & spending → Inflation control
What is expansionary policy (monetary)
Used to stimulate economic growth during slowdowns or recessions
How is expansionary monetary policy conducted (interest rates)
Lower interest rates → More borrowing & spending → Economic boost
What is quantitative easing
When assets are bought to increase the money supply
How does quantitative easing boost the economy
Central bank buys financial assets (government bonds) → injects money into the economy → increases money supply → encourages lending & investment → boosts economic growth
How is expansionary fiscal policy conducted (government spending)
Increased spending → Stimulates economic growth → Creates jobs and boosts demand → Promotes investment → Fuels economic expansion
How is contractionary fiscal policy conducted (government spending)
Reduced spending → Helps control inflation → Reduces demand in the economy → Slows economic growth → Controls rising prices
How is expansionary fiscal policy conducted (taxation)
Increased taxes → reduces disposable income → decreases consumer spending → slows economic growth → helps control inflation
How is contractionary fiscal policy conducted (taxation)
Decreased taxes Increases disposable income Boosts consumer spending Stimulates economic growth
What is a budget deficit
When government expenditure exceeds revenue, leading to borrowing
What is a budget surplus
When government revenue exceeds expenditure, allowing for debt repayment or savings
What are direct taxes
Levied on income or profits
What are indirect taxes
Levied on goods and services
The MPC set the base rate, the interest rate at which the Bank of England lends to commercial banks. The goal is to maintain 2% inflation
Advantages of demand side policies
- Stimulates economic growth
- Reduces unemployment
- Counteracts recession
Disadvantages of demand side policies
- Inflationary pressures
- Increased government debt
- Crowding out effect
What are market-based policies
Aim to remove obstacles that prevent the free market from working efficiently
What are interventionist policies
Policies designed to correct market failure
What is the market base policy to increase incentive
- Having lower income/corporation tax to encourage work/investment
- Reducing benefits to increase the opportunity cost of being out of work
What is the market base policy to increase competition
By deregulating or privatising the public sector, firms can compete in a competitive market
What is the market base policy to reform the labour market
- Remove the national minimum wage allowing market forces to allocate wages
- Reduce trade union power makes employing workers less restrictive and increases the mobility of labour.
What is the interventionist policies to increase competition
A stricter government competition policy to reduce monopoly power of some firms and ensure smaller firms can compete too
What is the interventionist policies to increase labour market
Increase labour mobility by offering relocation subsidies and improving access to job vacancy information.
What is the interventionist policies to improve skills and quality of the labour force
- Could subsidise training -> lowering costs for firms
- Spending more on education -> workers will be more skilled and efficient
- Spending more on healthcare helps -> improves quality of the labour force -> higher productivity
What is the interventionist policies to improve infrastructure
Increasing government spending on infrastructure
Strengths of supply side policies
- Can deal with structural unemployment as the labour market can be improved
- Increases international competitiveness
- Long-Term Economic Growth as it increases productivity
Disadvantages of supply side policies
- Significant time lags associated with supply-side policies and not all policies will be successful
- Policies may impact AD before AS causing inflation
- Harms government budget
- If there’s spare capacity then it would have no impact
What is the synoptic point to these policies
Some policies target microeconomic issues, like weak monopolies, to improve the overall economy. A weak microeconomy prevents macroeconomic goals.
What is the conflict between economic growth vs inflation
A growing economy -> increase in price level -> leads to inflation
What is the conflict between economic growth vs current account
Economic growth -> increased spending -> high MPM -> leads to current account deficit
What is the conflict between economic growth vs government budget deficit
Reducing budget deficit -> reduce in expenditure, increase tax revenue -> decrease in AD -> less economic growth
What is the conflict between economic growth vs environment
High economic growth -> increase negative externalities (pollution and usage of non-renewable resources)
What is the conflict between economic growth vs inflation
Economic growth increases -> unemployment falls (job creation) -> wages increase -> increased consumption -> increase in price level -> inflationary pressure
What is the conflict between economic growth vs inflation
If green taxes are implemented or if minimum prices are put of TPP’s -> competitiveness decreases as production is limited
What is the conflict between fiscal policy vs monetary policy
Expansionary fiscal policies involve more government borrowing -> cause
interest rates and the inflation rate to rise.
What is the conflict between interest rates vs inequality
Low interest rate could affect the distribution of income. Savers only receive a small return on their savings.
What is the synoptic point to these policies
Microeconomic policies can negatively impact the overall economy, and vice versa. For example, indirect taxes to fix market failures may reduce competitiveness and lower SRAS
