2.6 - Macroeconomic Objectives and Policies

Question 1

Give the two types of demand-side policies.

Answer 1

• Demand side policy

- Fiscal policy

Question 2

What is monetary policy?

Answer 2

This is where interest rates, exchange rates, and money supply are used to manipulate economic growth.

Question 3

What are the main objectives of monetary policy?

Answer 3

• To keep a low inflation rate at the target of 2%, within a range of +/- 1%.
• Control money supply
• Keep economic growth in a strong position

Question 4

Who controls monetary policy?

Answer 4

The central bank of a country; in this case, the Bank of England (BoE) manages monetary policy.

Question 5

What is the MPC?

Answer 5

The MPC (Monetary Policy Committee) is a sector of the BoE (Bank of England) which tries to maintain positive economic growth through altering interest rates.

Question 6

What do MPC members discuss?

Answer 6

The 9 members of the MPC meet monthly to discuss the current state of the economy, and how they can use interest rates to help maintain positive economic growth.

Question 7

What is expansionary monetary policy?

Answer 7

Expansionary monetary policy is where interest rates are cut, shifting AD to the right from AD to AD1 (reducing savings ratio), and increasing real national output and economic growth.

Question 8

What is contractionary monetary policy?

Answer 8

Contractionary monetary policy is where interest rates are increased, decreasing AD by shifting it to the left from AD to AD1, decreasing real national output and economic growth.

Question 9

What is fiscal policy?

Answer 9

Fiscal policy is a type of demand-side policy which involves the 3 instruments: government spending, taxation and government borrowing, to manipulate economic growth.

Question 10

Give the objectives of fiscal policy.

Answer 10

• Keep inflation rate at UK target 2%.
• Stimulate economic growth and employment in times of recession
• Maintain stable economic cycle

Question 11

What is expansionary fiscal policy?

Answer 11

Expansionary fiscal policy is where the government aims to positively stimulate economic activity.

Question 12

Give the objectives of expansionary fiscal policy.

Answer 12

• Raising government spending
• Cutting taxation
• Increasing budget deficit (helps increase borrowing)

Question 13

What is contractionary fiscal policy?

Answer 13

Contractionary fiscal policy is where the government aims to slow economic activity.

Question 14

Give objectives of contractionary fiscal policy.

Answer 14

• Increase taxation as this can reduce national
• Reduce government spending
• Cutting budget deficit

Question 15

What is a fiscal budget deficit?

Answer 15

A fiscal budget deficit is where the government receives less income through taxation and other government revenue. This can lead to increased debt, increasing the debt burden and future interest payments.

Question 16

What is a fiscal budget surplus?

Answer 16

A fiscal budget surplus is where the government receives more income through taxation and other government revenue. This leads to reduced debt, deceasing the debt burden and future interest payments.