2.6 macroeconomic objectives and policies Flashcards
the four macro economic objectives
-economic growth
-low unemployment
-low and stable rate of inflation
-balance of payments equilibrium on current account
additional macro economic objectives
-balanced government budget
-protection of the environment
-greater income equality
demand side policies
-designed to increase consumer demand so that total production in the economy increases
distinction between monetary and fiscal policy
monetary policy
used by the government to control money flow of the economy
-done with interest rates and quantitive easing, conducted by the bank of england
fiscal policy
uses government spending and revenues from taxation to influence ad
-conducted by the government
low interest rates in monetary policy to increase ad
-consumption and investment increase due to lower cost of borrowing
-high consumption
-saving becomes less attractive as lower rate of return
-low interest rates will reduce the incentive for investors to hold their money in british banks so demand for pound will fall
quantitive easing
a method to pump money directly into the economy
-inflationary effects since it increases money supply and reduces the value of the currency
limitations of monetary policy
-banks might not pass the base rate onto consumers
-even if the cost of borrowing is low, consumers may be unable to borrow because banks are unwilling to lend
-if consumers think the economy is still risky they may be less likely to spend even if interest rates are low
expansionary fiscal policy
-aims to increase ad
-governments increase spending or reduce taxes to do this
-leads to a worsening of the government budget deficit and may mean governments have to borrow more to finance this
deflationary fiscal policy
-aims to decrease ad
-governments cut spending or raise taxes which reduces consumer spending
-leads to an improvement of the government budget deficit
budget deficit
when expenditure exceeds tax receipts in a financial year
budget surplus
when tax receipts exceed expenditure
direct taxes
imposed on income and are paid directly to the government from the tax payer
e.g income tax, corporation tax, inheritance tax
indirect tax
imposed on expenditure of goods and increase production costs for producers
this increases market price and demand contracts
limitations of fiscal policy
-governments might have imperfect information about the economy leading to inefficient spending
-significant lag time involved with employing fiscal policy
-bigger the size of the multiplier, the bigger the effect on ad and the more effective the policy
-if interest rates are high, fiscal policy might not be effective for increasing demand
the distinction between market based and interventionist policies
market based policies limit the intervention of the government and allow the free market to be eliminate imbalances, the forces of supply and demand are used
interventionist policies rely on the government intervening in the market
market based policies
-to increase incentives
-to promote competition
-to reform the labour market
interventionist policies
-to promote competition
-to reform the labour market
-to improve skills and quality of the labour force
-to improve infrastructure
strengths and weaknesses of supply side policies
strengths
-the only policy that deals with structural unemployment as it can be directly improved with education and training
weaknesses
-demand side is better with dealing with cyclical unemployment since they can reduce the negative output gap and shift the ad curve to the right
-significant time lags
-market based supply side policies could lead to more unequal distribution of wealth
-negative impacts on government budget due to higher government expenditure
-if there is lots of spare capacity then supply side policies will have no impact
economic growth vs inflation
a growing economy is likely to experience inflationary pressures on the average price level
this is especially true when there is a positive output gap and ad increases faster than as
economic growth vs current account
during periods of high economic growth consumers have high levels of spending which worsens the current account deficit
economic growth vs government budget deficit
reducing a budget difficult requires less expenditure and more tax revenue
leads to a fall in ad and as a result less economic growth
economic growth vs the environment
high rates of economic geothermal increase high levels of negative externalities like pollution and the usage of non renewable resources due to manufacturing
unemployment vs inflation
as economic growth increases, unemployment falls due to more jobs being created, however this causes wages to increase leading to more consumer spending and an increase in the average price level
