2.6 macroeconomic objectives and policies

Question 1

the four macro economic objectives

Answer 1

-economic growth
-low unemployment
-low and stable rate of inflation
-balance of payments equilibrium on current account

Question 2

additional macro economic objectives

Answer 2

-balanced government budget
-protection of the environment
-greater income equality

Question 3

demand side policies

Answer 3

-designed to increase consumer demand so that total production in the economy increases

Question 4

distinction between monetary and fiscal policy

Answer 4

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

Question 5

low interest rates in monetary policy to increase ad

Answer 5

-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

Question 6

quantitive easing

Answer 6

a method to pump money directly into the economy
-inflationary effects since it increases money supply and reduces the value of the currency

Question 7

limitations of monetary policy

Answer 7

-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

Question 8

expansionary fiscal policy

Answer 8

-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

Question 9

deflationary fiscal policy

Answer 9

-aims to decrease ad
-governments cut spending or raise taxes which reduces consumer spending
-leads to an improvement of the government budget deficit

Question 10

budget deficit

Answer 10

when expenditure exceeds tax receipts in a financial year

Question 11

budget surplus

Answer 11

when tax receipts exceed expenditure

Question 12

direct taxes

Answer 12

imposed on income and are paid directly to the government from the tax payer

e.g income tax, corporation tax, inheritance tax

Question 13

indirect tax

Answer 13

imposed on expenditure of goods and increase production costs for producers
this increases market price and demand contracts

Question 14

limitations of fiscal policy

Answer 14

-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

Question 15

the distinction between market based and interventionist policies

Answer 15

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

Question 16

market based policies

Answer 16

-to increase incentives
-to promote competition
-to reform the labour market

Question 17

interventionist policies

Answer 17

-to promote competition
-to reform the labour market
-to improve skills and quality of the labour force
-to improve infrastructure

Question 18

strengths and weaknesses of supply side policies

Answer 18

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

Question 19

economic growth vs inflation

Answer 19

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

Question 20

economic growth vs current account

Answer 20

during periods of high economic growth consumers have high levels of spending which worsens the current account deficit

Question 21

economic growth vs government budget deficit

Answer 21

reducing a budget difficult requires less expenditure and more tax revenue
leads to a fall in ad and as a result less economic growth

Question 22

economic growth vs the environment

Answer 22

high rates of economic geothermal increase high levels of negative externalities like pollution and the usage of non renewable resources due to manufacturing

Question 23

unemployment vs inflation

Answer 23

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