2.6 macroeconomic objectives and policies

Question 1

what are the macroeconomic objectives?

Answer 1

economic growth, low unemployment, low inflation, balanced current account, reduce budget deficit, reduce inequality, environmental protection

Question 2

how is economic growth measured?

Answer 2

GDP

Question 3

how is low unemployment measured?

Answer 3

ILO, claimant count labour survey

Question 4

how is low inflation measured?

Answer 4

CPI

Question 5

how is balanced current account measured?

Answer 5

(X-M), volume or value

Question 6

how is reduced budget deficit measured?

Answer 6

% of GDP

Question 7

how is environmental protection measured?

Answer 7

CO2 emissions

Question 8

economic growth vs inflation?

Answer 8

rapid increases in aggregate demand are likely to lead to rising inflation, steps to keep inflation low dampen consumer spending and reduce growth

Question 9

economic growth vs inflation evaluation?

Answer 9

economic growth based on supply side improvement reduce inflation, supply side policies which improve mobility , lead to increases in output and productivity, lowering inflation. depending on where economy is in the economic cycle and level of current level of inflation

Question 10

unemployment vs inflation?

Answer 10

falling unemployment tends to lead to higher inflation, unemployment falls a shortage of labour means workers bargaining position is stronger

Question 11

unemployment vs inflation evaluation?

Answer 11

unemployment and inflation rise/fall together, trade off is not always present in real world, supply side improvements could create jobs and improve productivity

Question 12

economic growth vs environment?

Answer 12

economies grow and living standards increase, consumptions of g/s tend to rise, greater consumption of scarce resources and the pollution created from production and energy potential to cause environmental damage

Question 13

economic growth vs environment evaluation?

Answer 13

rapid environmental degradation often occurs earlier in economy’s industrial development, hope that technological advances might help to achieve both economic growth and reduction in environmental damage

Question 14

economic growth vs fiscal deficit reduction?

Answer 14

attempts to reduce the fiscal deficit involve cutting spending and/or raising taxes, withdrawal effect of circular flow of income, likely fall in aggregate demand. reducing GDP

Question 15

economic growth vs fiscal deficit reduction evaluation?

Answer 15

growth comes first, then rising spending and falling unemployment should lead to improvement in the fiscal balance

Question 16

what is the role of demand side policies?

Answer 16

macroeconomic policies designed to influence level of AD, deliberate action taken by governments or monetary authorities to shift the AD curve

Question 17

what are the types of demand side policies?

Answer 17

monetary policy, fiscal policy

Question 18

what is monetary policy?

Answer 18

manipulation of monetary variables in order to influence the level of AD

Question 19

what is fiscal policy?

Answer 19

manipulation of government spending and taxation in order to influence the level of AD

Question 20

what are the monetary policy instruments?

Answer 20

interest rates and quantitative easing

Question 21

interest rate and monetary policy?

Answer 21

cost of borrowing money or return received for saving. decrease AD: if inflation is above target level MPC may raise base interest rate to decrease AD, C, I and (X-M) tend to fall, AD shift left increase AD: inflation below then MPC reduce base interest rate to increase AD (shift right)

Question 22

monetary policy and quantitative easing?

Answer 22

occurs when central bank buys government bonds or other securities in order to increase money supply in the economy, stimulate AD: demand for assets increase, prices rose, interest rate on them fall

Question 23

what are the fiscal policy instruments?

Answer 23

government expenditure through direct and indirect taxes

Question 24

direct taxes on fiscal policy?

Answer 24

income tax and corporation tax, rise in direct taxes mean people have reduced disposable income and reduced incentives to work

Question 25

indirect taxes on fiscal policy?

Answer 25

VAT, indirect taxes raised cost of living increases, most lower incomes tax paid is a higher proportion of their income than for those on higher incomes

Question 26

fiscal policy for AD?

Answer 26

increase AD would increase government expenditure and decrease taxes , expansionary effect on AD, multiplier effect

Question 27

what is a fiscal or budget deficit?

Answer 27

government spends more than it receives in taxation, increase in AD

Question 28

what is a fiscal or budget surplus?

Answer 28

government spends less than it receives in taxation, decrease in AD

Question 29

what are the limitations of BoE base rate?

Answer 29

trade-offs of macroeconomic objectives, limit to how low rates can go, no guarantee of banks lowering rates, no guarantee that consumers and firms will demand more credit or that credit will become available

Question 30

how does quantitative easing work?

Answer 30

BoE creates money, BoE buys govt bonds from banks, banks more incline’s to firms and individuals, greater lending boosts C+I and so AD, BoE sell bonds after recovery to avoid long term inflation

Question 31

what tools are involved in monetary policy?

Answer 31

interest rates, money supply, managing exchange rates, government designed to influence money, BoE, quantitative easing

Question 32

what are the objectives of monetary policy?

Answer 32

influence aggregate demand, price stabilising, made independant in 1997, no political considerations

Question 33

what factors need to be considered when MPC set the base rate?

Answer 33

consumer spending, investment by firms, economic cycle, output gaps, house prices, inflation overseas

Question 34

what are strengths of supply-side policies?

Answer 34

(keysion) only way to get a country out of demand-deficient unemployment and stagnation, multiplier is large significant impact on growth, spare capacity economy can grow quick, act quickly and solve the problem

Question 35

what are weaknesses of demand side policies?

Answer 35

(classical) only cause inflation in the long-run, multiplier might be low-little effect, no spare-capacity - supply side policies needed, government can end up running a huge budget deficit

Question 36

how is savings affected by changing interest rates?

Answer 36

lower interest rates discourage savings

Question 37

how is borrowing affected by changing interest rates?

Answer 37

lower rates make new loans cheaper, lower rates makey monthly repayment cost cheaper

Question 38

how is exchange rates affected by changing interest rates?

Answer 38

reduce value of domestic currency

Question 39

what are quantitative easing limitations?

Answer 39

-trade off of macroeconomic objectives
-potential long-term inflationary pressure due to increased amount of money in economy
-information problem

Question 40

what is automatic stabilisers?

Answer 40

government spending exceeds total revenue from taxation, net injection into economy, reverses in a boom

Question 41

what is discretionary spending?

Answer 41

where the government intervenes to spend more

Question 42

what are supply side policies?

Answer 42

designed to increase LRAS through measures to increase the productivity and efficiency of the economy can be through market forces or government

Question 43

market based supply side policies?

Answer 43

policies working through market mechanism, increase incentives, increase competition, reduce bureaucracy

Question 44

interventionist supply-side policies?

Answer 44

government intervention to overcome market failures, government expenditure designed to increase productivity

Question 45

market based policies part 2?

Answer 45

increased incentives for workers, labour market reforms, reduction in cooperation taxes, increased competition, removing 1regulations that are preventing firms from growing

Question 46

supply-side policies part 2?

Answer 46

improving the skills and quality of the workforce, incentives for investment, investment in infrastructure, finance for business start-ups, investment in new technology

Question 47

what are strengths of supply-side policies?

Answer 47

-economic growth can be achieved without inflationary pressures building up
-some supply-side policies help increase productivity
-supply-side policies may be used to achieve economic growth
-less likely to cause a conflict with other macroeconomic objectives

Question 48

what are weaknesses of supply-side policies?

Answer 48

• if AD is low, would have no impact on real output
  -interventionist policies might be expensive
  -take considerable amount of time to work
  -might increase income inequality