2.6 macroeconomic objectives and policies - definitions

Question 1

Demand-side policies

Answer 1

Policies to change the level of Aggregate Demand in the economy

Question 2

Fiscal Policy

Answer 2

Policies that change the level of Public spending, taxation or borrowing in order to manage the level of Aggregate Demand.

Question 3

Expansionary fiscal policy

Answer 3

Tax cuts/spending increases designed to boost Aggregate Demand.

Question 4

Contractionary fiscal policy

Answer 4

Tax rises/spending cuts designed to reduce Aggregate Demand.

Question 5

Budget Surplus

Answer 5

Tax revenue exceeds public expenditure

Question 6

Budget Deficit

Answer 6

Public expenditure exceeds tax revenue.

Question 7

Government Bonds

Answer 7

The Government sells bonds to pay for its borrowing.

Question 8

Automatic stabilisers

Answer 8

When the economy goes into recession, Government spending will rise automatically. Because Public spending will go up because unemployment benefits increase tax revenues fall

Question 9

Discretionary fiscal policy

Answer 9

The Government deliberately decides to change taxes or spending to boost or slow down the economy. Discretion means it is an actual Government decision, not an automatic change.

Question 10

Monetary policy

Answer 10

Decisions made by the Bank of England that change the money supply and the interest rate

Question 11

B of E MPC

Answer 11

The organisation that runs Monetary policy in the UK. Sets interest rates for the whole economy. They meet once a month.

Question 12

Inflation Target

Answer 12

2%, plus or minus one. Measured on the CPI. Symmetrical target.

Question 13

Expansionary monetary

Answer 13

Interest rate cuts which boost Aggregate Demand

Question 14

Contractionary monetary

Answer 14

Interest rate rises which reduce Aggregate Demand.

Question 15

The zero-rate problem

Answer 15

Interest rates cannot cut interest rates below zero. The real interest rate, is the nominal interest rate minus inflation. So even though the Bank has cut the interest rate as low as it can, falling prices will mean that the real interest rate is positive and it could be rising.

Question 16

Quantitative Easing

Answer 16

The Bank of England electronically creates new money to try to boost the economy by using the new cash and uses it to buy assets - usually Government bonds which will increase demand for them, pushing the price up. When the price of bonds rises, the interest rate falls and asset prices rise. This should boost AD through raising C and I.

Question 17

Credit Crunch

Answer 17

Events in 2007-2008 that led to the Great recession. US House prices fell. Banks around the world which had lent too much money on US mortgages began to lose money and some went bankrupt. Business & confidence fell rapidly, sparking panic and a global recession.

Question 18

Supply side policies

Answer 18

Policies design to boost the productive potential of the economy or shift the LRAS curve to the right.

Question 19

SSP Examples

Answer 19

Market-based:
-Income tax cuts / Corporation Tax cuts.
-Benefit cuts or lower minimum wages.
-Deregulation to reduce business costs.

Government interventionist based:
-Education and skills spending.
-Infrastructure spending (transport etc.)
-Government-sponsored Research and Development spending.

Question 20

The Phillips Curve (Short Run).

Answer 20

A curve that shows the relationship between inflation and unemployment in the short run. The original downward-sloping Phillips Curve showed that there was a trade-off between inflation and unemployment.

Question 21

The Long-run Phillips Curve

Answer 21

A vertical Phillips Curve. This shows that in the long-run there is no trade-off between inflation and unemployment. You cannot reduce the unemployment rate without inflation increasing.

Question 22

NAIRU

Answer 22

The Non-Accelerating Inflation Rate of Unemployment. The rate of unemployment at which the inflation rate is stable – if it falls lower, inflation begins to accelerate.