2.6 Macroeconomic Objectives and Policies

Question 1

UK macro objectives

Answer 1

Economic growth
Low unemployment
Low inflation
BoP equilibrium
Balanced govt budget

Question 2

Demand side policies objective

Answer 2

To shift AD in the economy

Question 3

Two types of demand side policy

Answer 3

Fiscal policy and monetary policy

Question 4

What is a Fiscal policy?

Answer 4

Government spending and taxation used to shift AD

Question 5

What is a Monetary Policy?

Answer 5

Adjusting interest rates and the money supply (QE)

Question 6

Direct taxes vs Indirect taxes

Answer 6

direct- imposed on income and profits and paid straight to the govt
indirect- imposed on spending and not directly to the govt

Question 7

Quantitative Easing

Answer 7

When the Bank of England buy assets in exchange for money to increase the money flow in the economy when demand is low

Question 8

QE pros cons

Answer 8

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

Question 9

Expansionary vs Contractionary Demand side policies

Answer 9

Expansionary-aim to increase AD
Contractionary-aim to decrease AD

Question 10

Expansionary Policy examples

Answer 10

reduce taxes
reduce interest
increase govt spending
QE

Question 11

Contractionary Policy examples

Answer 11

increase tax
increase interest
less QE
decrease govt spending

Question 12

Monetary policy pros cons

Answer 12

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

Question 13

Fiscal policy pros cons

Answer 13

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)

Question 14

What are supply side policies for

Answer 14

to shift LRAS

Question 15

2 types of supply side policies

Answer 15

Interventionists
Market based

Question 16

What are interventionist supply side policies

Answer 16

Used to increase the full employment level of output and to correct market failure

Question 17

What are market based interventionists supply side policies

Answer 17

to remove obstructions in the free market that’s restricting growth

Question 18

Aims of supply side policies

Answer 18

promote competition
increase incentives
improve infrastructure
improve skills/quantity of labour

Question 19

What are the two main monetary policies

Answer 19

changing interest rates
QE

Question 20

chain of analysis for increasing interest rates (3 diff chains)

Answer 20

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

Question 21

QE introduction chain of analysis

Answer 21

QE-> banks buy assets->higher demand for assets->higher price for assets->wealth effect-. higher C and I-> higher AD