2.6 Macroeconomic Objectives And Policies Flashcards
What are the four key macroeconomic objectives
• economic growth - long run trend growth is about 2.5%, governments aim to have sustainable economic growth for the long run
• low unemployment - governments aim to have as near to full employment as possible. They aim for an unemployment rate of around 3%
• low and stable inflation - the government target it 2%, measured by CPI.
•balance of payment equilibrium on the current account - important to allow the country to sustainably finance the current account, which is important for long term growth
Other macroeconomic objectives
• Balance government budget - ensured inform of state borrowing, so national debt does not escalate
• protection of the environment - aims to provide long run environmental stability. Ensures resources are not exploited, such as oil and natural gas.
• greater income equality - minimises gap between rich and poor
Why are demand side policies used
Demand side policies are designed to manipulate consumer demand
What is expansionary policy aimed at
Expansionary policy is aimed at increasing AD to bring about growth
What is deflationary policy used for
Deflationary policy attempts to decrease AD to control inflation
What is monetary policy
Where the central bank or regulating authority attempts to control the level of AD by altering base interest rates or the amount of money in the economy
What is fiscal policy
Use of borrowing, government spending and taxation to manipulate the level of AD and improve macroeconomic performance.
Why does a rise in interest rates cause a fall in AD
• rise in interest rates will increase cost of borrowing for firms and consumers. Reduced investment and consumption. Also makes saving more lucrative
• less people are borrowing and more saving, fall in demand for assets such as stocks, shares and government bonds. Leads to a fall in prices for these assets.
• people will become less confident about borrowing and spending if interest rates rates rise. Fall in confidence leads to fall in consumption and investment, reducing AD.
• higher rates will increase incentive for foreigners to hold their money in British banks as they can see a higher rate of return.
What are problems of demand management
• exchange rate may be affected so much that exports fall significantly and imports rise significantly, causing a trade defecit
• changes in interest rates take up to 2 years to have their full effect
• sometimes, interest rates are so low that they cannot be decreased any further to stimulate demand.
• lack of confidence in the economy may mean that, no matter how low interest rates are, consumers and businesses do not want to borrow and banks don’t want to lend
What is quantative easing
When the Bank of England buy assets in exchange for money in order to increase money supply and get money moving around the economy during times of low demand.
It can prevent the liquidity trap where even low interest rates cannot stimulate AD.
How does quantative easing increase AD
• since bank is buying assets, rise in demand and so asset prices rise. Causes a positive wealth effect since shares, houses etc.. are worth more so people will increase consumption
• the money supply increases. Priv sector companies receive more money which they can spend on goods and services or other financial assets, which may increase investment or consumption and therefore increase AD.
• commercial banks may Lower their interest rates as they are receiving so much from the Bank of England and so can offer very low interest rates to deal with their customers
Problems with quantative easing
• Very risky and if not controlled properly could cause high inflation and even hyperinflation
• others say it would only lead to increased demand for second hand goods which pushes up prices but does not increase AD
• no guarantee that higher asset prices lead into higher consumption through the wealth effect, especially if confidence remains low
• large effect on housing market stimulating demand and leading to rapid rises since 2013
• not meant to be permanent and there are concerns thay banks and economies are too dependent on QE.
What is the role of the Bank of England in the economy
• controls monetary policy. The monetary policy committee (MPC) makes most important decisions.
• their main aim is to keep inflation at 2%
• committee made up of 9 people, 5 from bank, 4 outisde economists
Two main ways fiscal policy can be used to effect AD
• rise in income tax will cause a fall in disposable income. Lead to reduction in consumption and decrease AD.
• rise in government spending will increase AD dice it is one component
What is a budget defecit and surplus
A budget deficit is when the government spends more money than the receive. A budget surplus is when the government receives more money than they spend.
