2.6 Macroeconomic Objectives And Policies Flashcards
What are the macroeconomic objectives?
- Low and stable inflation (2%)
- Sustainable economic growth
- Low unemployment
- Balanced government budget
- Protection of environment
- Redistribution of income - income equality
- Balanced trade on current account of BOP
What is fiscal policy?
Changes to government spending and taxation in order to influence AD.
Drawbacks of fiscal policy.
Demand pull inflation
Current account deficit
Worsening of government finances
Time lags
Gov may have imperfect knowledge about economy leading to inefficient spending
What is direct tax?
Tax levied directly on individual or organisation
E.g income tax, corporation tax
What is indirect tax?
Tax levied directly on a good or service
E.g. VAT, council tax
what is a budget deficit?
When expenditure > tax revenue
What is a budget surplus?
When tax revenue > spending
What is monetary policy?
Changes to the interest rates and the money supply by the central bank in order to influence AD.
Cons of monetary policy.
Demand pull inflation
Current account deficit
Lowering interest rates only effective as stimulating investment and consumption if confidence high
Negative impact on savers
Time lags
What are supply side policies?
Policies designed to increase the productive capacity of the economy, shifting LRAS to the right
Interventionist supply side policies
- Gov spending on education/ training
- Gov spending on infrastructure
- Subsidies to firms to promote investment
Market based supply side policies.
- Tax reform (lowering income and corporation tax)
- Labour market reforms (reducing benefits, reduction in minimum wage and trade union power)
- Competition policy (privatisation and deregulation)
Costs of supply side policies.
Time lags
No guarantee of success
Output gaps
Negative impact on gov budget
On Keynesian curve, if economy producing on elastic part, no change in output following policy
