2.6 Macroeconomic objectives and policies

Question 1

What are the possible macroeconomic objectives?

Answer 1

• economic growth
• low unemployment
• low and stable rate of inflation
• balance of payments equilibrium on current account
• balanced government budget
• protection of the environment
• greater income equality

Question 2

What is fiscal policy?

Answer 2

Decisions made by the gov on its expenditure, taxation and borrowing.
Can by expansionary (boost AD) or contractionary (reduce AD).

Question 3

Reasons for expansionary fiscal policy

Answer 3

• boost growth
• reduce unemployment (labour is derived demand)
• redistribute income (inc. spending on welfare spending or reduce taxes on lower tax bands)

Question 4

Reasons for contractionary fiscal policy

Answer 4

• reduce budget deficit/national debt
• redistribute income
• reduce current account deficit (AD is reduced, incomes lower so less imports, ceteris paribus)

Question 5

Expansionary fiscal policy examples

Answer 5

• reduce income tax
• reduce regressive taxes e.g. VAT, inc. disposable income
• reduce corporation tax (inc. retained profit)
• increase government spending; healthcare, infrastructure, public sector spending

Question 6

Expansionary fiscal policy and LRAS - side effects (not intentions)

Answer 6

LRAS may shift to the right

• reduction in income tax, incentive for workers to work harder & be more productive to earn more. Inc. quality of labour. keep more income as disp. income
• reduction in corporation tax boosts investment therefore boost AD. (increases productive efficiency of economy) and LRAS
• increase in GS on infrastructure, boost efficiency of economy
• increase in GS on healthcare, boost quality of labour. prod healthy working labour force.

Question 7

Monetary policy

Answer 7

the decisions made by the central bank on the money supply, interest rate and exchange rate to influence AD.
Mandate for the BofE is to control inflation within the 2% target.

Question 8

Reasons for expansionary monetary policy

Answer 8

• increase inflation
• increase growth
• reduce unemployment

Question 9

Reasons for contractionary monetary policy

Answer 9

• reduce inflation
• prevent asset/credit bubble; risk of crash & recession
• prevent excessive growth of house prices
• reduce excess debt & promote saving
• reduce current account deficit