2.6 Macroeconomic Objectives and Policies

Question 1

List the 7 macroeconomic objectives

Answer 1

High economic growth (2.5%)
Low unemployment (4%)
Low inflation (2%)
Balanced current account
Reduce inequality
Environmental Impact
Reduce budget deficit

Question 2

Explain the role of demand side policies

Answer 2

Demand side policies influence the AD

Question 3

What are the tools involved with monetary policy

Answer 3

Interest rates, Quantitative easing, Exchange rates

Question 4

Explain the role of the MPC

Answer 4

To predict the rate of inflation 24 months in the future, and to set the rate of interest and level of quantitative easing

Question 5

Explain how quantitative easing may lead to greater inflation and real output

Answer 5

The government buys bonds off of banks providing banks with more money to lend to investors and consumers increasing investment and consumer spending shifting AD outwards + asset price increase means positive wealth effect

Question 6

Give two disadvantages of using the base rate

Answer 6

Trade off of macroeconomic objectives
No guarantee of retail banks lowering their rates to the base rate

Question 7

Give two disadvantages of Quantitative easing

Answer 7

Trade off of macroeconomic objectives
Long term inflationary pressure due to greater money supply in the economy

Question 8

What are the tools involved with fiscal policy

Answer 8

Government spending, taxation and borrowing

Question 9

What is a direct tax

Answer 9

Tax that is on your income

Question 10

What is an indirect tax

Answer 10

Tax that is put on goods and services

Question 11

Explain the difference between budget surplus and deficit

Answer 11

Surplus - Tax > Gov Spending
Deficit - Tax < Gov Spending

Question 12

Explain the difference between automatic stabilisers and discretionary spending

Answer 12

An automatic stabiliser is spending automatically as a result of something happening
Discretionary spending is where the government chooses to spend money

Question 13

Give two disadvantages of fiscal policy

Answer 13

Time lags
Imperfect data - could lead to gov failure

Question 14

Explain the role of supply side policies

Answer 14

Any policy intending to increase the productive potential of an economy (Q^2CELL)

Question 15

Explain the difference between market-based and interventionist methods

Answer 15

Market-Based - Remove barriers to make markets work more efficiently
Interventionist - Designed to correct market failure

Question 16

Explain how supply-side policies could help reduce unemployment

Answer 16

Many supply side policies are expansionary, which promotes job creation
Long term improvements in the economy could be good for job creationb

Question 17

Explain how supply-side policies can help to reduce inflation

Answer 17

Expansion in LRAS leads to fall in price level. Improvements in efficiency and productivity help to reduce business costs and prices

Question 18

Explain how supply-side policies can help to reduce a current account deficit

Answer 18

Improvements in competitiveness means exports are more competitive in the foreign market, improving the current account

Question 19

Give two disadvantages of supply-side policies

Answer 19

Time lags
Cost