2.6 Macroeconomic Objectives and Policies Flashcards
UK macro objectives
Economic growth
Low unemployment
Low inflation
BoP equilibrium
Balanced govt budget
Demand side policies objective
To shift AD in the economy
Two types of demand side policy
Fiscal policy and monetary policy
What is a Fiscal policy?
Government spending and taxation used to shift AD
What is a Monetary Policy?
Adjusting interest rates and the money supply (QE)
Direct taxes vs Indirect taxes
direct- imposed on income and profits and paid straight to the govt
indirect- imposed on spending and not directly to the govt
Quantitative Easing
When the Bank of England buy assets in exchange for money to increase the money flow in the economy when demand is low
QE pros cons
Pros- rise in demand->assets prices rise->wealth affect->consumption
increased money supply->private sector firms can spend->increased investment or C->increased AD
Cons- high risk and can cause hyperinflation as value will decrease
- no guarantee that higher asset prices will lead to higher consumption as confidence may be low
Expansionary vs Contractionary Demand side policies
Expansionary-aim to increase AD
Contractionary-aim to decrease AD
Expansionary Policy examples
reduce taxes
reduce interest
increase govt spending
QE
Contractionary Policy examples
increase tax
increase interest
less QE
decrease govt spending
Monetary policy pros cons
Pros- targets inflation and maintains stable prices
-depreciation can increase exports
Cons- time lag
-consumers may not react to low interest rates if confidence is low
Fiscal policy pros cons
Pros-shorter time lag than monetary policies
-increased consumption of merit goods
-can increase LRAS
Cons-conflict of objectives (eg. cutting taxes to increase economic growth may cause inflation)
What are supply side policies for
to shift LRAS
2 types of supply side policies
Interventionists
Market based
What are interventionist supply side policies
Used to increase the full employment level of output and to correct market failure
What are market based interventionists supply side policies
to remove obstructions in the free market that’s restricting growth
Aims of supply side policies
promote competition
increase incentives
improve infrastructure
improve skills/quantity of labour
What are the two main monetary policies
changing interest rates
QE
chain of analysis for increasing interest rates (3 diff chains)
higher rates->higher cost of borrowing->lower C and I->lower AD and higher savings
higher rates->lower borrowing->lower asset demand->lower asset prices->negative wealth affect->lower C->lower AD
higher rates->more foreigners putting money into UK banks (greater return on savings)->more demand for £->higher £ price->SPICED-> lower AD
QE introduction chain of analysis
QE-> banks buy assets->higher demand for assets->higher price for assets->wealth effect-. higher C and I-> higher AD
