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