2.6 - Macroeconomic objectives and policies Flashcards
What are the possible macroeconomic objectives?
- Sustainable economic growth
- Low unemployment
- Low and stable rate of inflation (2%)
- Balance of payments equilibrium on current account
- Balanced government budget
- Protection of the environment
- Greater income equality
What is sustained economic growth?
The level of output is increasing so citizens have increased living standards, but a rate where growth can be maintained
What is full employment?
Where those who are willing and able to work either have a job or can readily get one
What is price stability?
Where inflation is low and prices remain largely stable
What is monetary policy?
The manipulation of the rate of interest, the money supply, and exchange rates by the central bank in order to influence AD
What is the distinction between deflationary monetary policy and inflationary policy?
- Deflationary (tight) monetary policy: increases in interest rates/cuts to money supply in order to decrease AD and reduce inflation
- Inflationary (loose) monetary policy: decreases in interest rates/increases to money supply in order to increase AD and increase inflation
What is Quantitative easing (QE) and when is it used?
This is when the Bank of England buys assets in exchange for money to increase money supply and get money moving around the economy during times of very low demand
What is the quantitative easing process?
- Central bank prints electronic money
- That money is used to buy financial assets from financial institutions (government bonds)
- Price of gov bonds rises and yield (interest rates) fall
- Financial institutions either loan the money out or invest in risky corporate bonds or shares
- Price of corporate bonds rises and yield (interest rates) falls → reduces cost of borrowing
- Access to credit improves, global interest rates fall, willingness to lend rises at lower interest rates
- Stimulates borrowing, spending, & investment → AD & growth rise
What 4 ways does a rise interest rates cause a fall in AD?
- Increased cost of borrowing for firms and consumers
- Less people borrowing, more saving → fall in demand for assets such as stocks, shares & gov bonds → fall in prices for these assets (negative wealth effect)
- Lower confidence about borrowing & spending if interest rates rise
- Higher rates will increase the incentive for foreigners to hold their money in British banks as they can see a higher rate of return → increased demand for pound → value of the pound will rise
What are bonds?
Debt instruments issued by government/corporations to raise money from the government
What is the Monetary policy committee (MPC)?
- A committee of 9 people led by the governor of the Bank of England, who meet monthly to assess the state of the economy and decide whether to alter interest rates
- Independent of government to ensure no policy myopia
What is fiscal policy?
Policies that change the level of government spending, taxation or borrowing in order to manage the level of AD
What is the distinction between a budget deficit and budget surplus?
- Budget deficit: where government spending exceeds tax revenue
- Budget surplus: where tax revenue exceed government spending?
What is the distinction between direct and indirect taxes?
- Indirect taxes: charged on producers of goods and services and paid by the consumer indirectly
- Direct taxes: tax imposed on income or profit paid directly to the government by an individual or organisation
What are supply-side polices?
What are the two types?
Policies that seek to improve the long-run productive potential of the economy
- Market-based
- Interventionist
What are market-based supply-side policies?
Increased productive potential from allowing markets to operate more freely (less government interference) boosting competitiveness & efficiency
What are interventionist supply-side policies?
Government intervention in markets designed to promote factors of production where the free market would fail to do so
Why are supply-side policies important for the economy?
- Long-term growth: increases in AD and AS will eventually see no growth in actual output
- Higher living standards: policies that increase productivity will lead to greater output derived from FOP -> more g&s to go around
- Non-inflationary growth: allows output to rise into the LR without increased price level
- Welfare gains: more competition -> lower prices -> boost consumer surplus
- International competitiveness: boost net exports
- Budget balance: increased profits + tax revenue for gov
What are some general evaluations for supply-side policies?
- Knock-on effects: SSPs which involve increased gov spending could also increase AD
- Recessions: SSPs can’t tackle an output gap caused by suppressed AD
- Unemployment: short-term unemployment may occur as capital replaces workers
- Time lag: policies may take time to affect AS
- Likelihood of government failure: there are several cases of poorly administered government SSPs which have not had the desired outcome
What are some examples of market-based supply-side policies?
- Privatisation
- Deregulation
- Reducing corporation tax
- Labour market reforms
What is privatisation as a market-based SSP and what are some evaluation points?
- The transfer of inefficient state-owned firms into the private sector -> firms are exposed to competition and face a profit motive, promoting productivity gains
- Eval: Limited gains still to be made as most UK gov-owned firms have already been sold off
What is deregulation as a market-based SSP and what are some evaluation points?
- Removing legal restrictions on businesses to encourage competition -> increased competition for consumers -> increased productivity in order to lower prices
- Eval: possible disadvantages of excessive choice + deteriorating quality
What are some examples of interventionist supply-side policies?
- Education & training
- Work visas/immigration
- Public sector investment
- Increased house supply
- Healthcare provision
What is education and training as an interventionist SSP and what are some evaluation points?
- Increased quantity and quality of education & training -> labour becomes more productive -> increased productive potential
- Eval: Time lag while people train
