2.6-Macroeconomic Objectives and Policies Flashcards
What are the four Macroeconomic Objectives
1.Economic Growth (aim for 2.5%)
2.Low unemployment (aim for around 3%)
3.Low and Stable Inflation (Target is 2%)
4.Balance of payment equilibrium on the current account
What are demand-side Policies?
Policies designed to manipulate consumer demand
What is a demand side policy
Aimed at increasing AD to bring about growth
What is Deflationary Policy?
Attempts to decrease AD to control inflation
What is Monetary Policy?
Where central Bank attempts to control the level of AD by altering base interest rates or the amount of money in the economy
What is Fiscal Policy?
use of government spending and taxation to manipulate the level of aggregate demand and improve macroeconomic performance
What is a Positive Wealth Effect
People consume more in the economy as the value of their assets rise
What is a negative wealth effect
People consume less in the economy due to their assets decreasing in value
What is Expansionary Monetary Policy
CB decreases interest rates to inject more money into the circular flow of income to therefore stimulate aggregate demand
What is Contractionary Monetary Policy?
CB increases interest rates to attempt to decrease the level of aggregate demand in the economy this is due to high inflation in the economy
What is Unemployment?
A situation when an individual is actively looking for employment but is not able to find work
What is Voluntary Unemployment?
When an individual without a job isn’t willing to be employed at the going wage rate, usually opting to receive state benefits instead of working
Technological Unemployment
unemployment caused by technological developments or automation that make some workers’ skills obsolete
What does high interest rates mean for The value of the pound?
Higher rates will increase the incentive for foreigners to hold their money in British
banks as they can see a higher rate of return. As a result, there will be increased
demand for pounds and the value of the pound will rise .
EV for demand-side policies
1.Time lag- interest rates take up to 2 years to have full effect and small changes in interest rates may not affect people’s decisions.
2.If interest rates are so low they cannot be decreased any further to stimulate demand.(liquidity Trap)
3.BOE may change the base interest rate but that’s only the recommended rate
4.Dependent on Consumer and Business Confidence
5.High interest rates over a long period of time will discourage investment and decrease LRAS
4.Even if the cost of borrowing is low,consumers might be unable to borrow because are unwilling to lend ,ever since the 2008 financial crisis
What is Quantitative Easing
a monetary policy action where a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity
-Money supply increases as firms receive more money which they can spend in the economy
-Leads to rise in demand of asset prices causing a positive wealth effect
Ev for Quantitative Easing
-Its not meant to be permanent and banks are too dependent on it
-If not controlled properly could cause hyperinflation
-It would only lead to increased demand for second hand goods and making them more expensive
-No guarantee that higher asset prices lead into higher consumption if confidence is low
-Has a large negative effect on the housing market leading to a rapid price rise since 2013 worsening the issue of geographical mobility
-could cause asset bubbles where assets (houses) are overpriced
Two types of Fiscal Policy
-Increase in taxation to cause a fall in disposable income
-a rise in government spending, increase AD as its one of the components
Deflationary Fiscal Policy
Aims to decrease AD, Gov cuts spending or raise taxes, which reduces consumer spending. (improve Gov Deficit)
Direct taxes
Taxes are imposed on income and are paid directly to the gov from the taxpayer.
e.g.-Income Tax, Corporation Tax,NIC and inheritance
Indirect Tax
Imposed on expenditure on goods and services
(increase Production cost for consumers)
EV to Fiscal Policy
1.Gov might have imperfect information leading them to spend inefficiently
2.Time lag (years) to have an effect
3.If Gov spends too much they could have difficulties paying back debt
4.If interest rates are high then fiscal policy might not be effective for increasing demand
Current Base Interest Rate in the UK
5.25% (as of January 2024)
Current Unemployment Rate
4.2% (Nov 2023)
