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Y1 Macro > 2.6 Macroeconomic Objectives And Policies > Flashcards

2.6 Macroeconomic Objectives And Policies Flashcards

1
Q

What are the four key macroeconomic objectives of the government?

A
  • Economic growth
  • Low unemployment
  • Low and stable inflation
  • Balance of payment equilibrium on the current account

Other objectives include balance government budget, protection of the environment, and greater income equality.

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2
Q

What is the long run trend of economic growth in the UK?

A

About 2.5%

Governments aim for sustainable economic growth over the long run.

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3
Q

What unemployment rate does the government aim for?

A

Around 3%

This accounts for frictional unemployment.

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4
Q

What is the government target for inflation in the UK?

A

2%, measured by CPI

If inflation falls 1% outside the target, the Governor of the Bank of England must explain the situation to the Chancellor.

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5
Q

What does the balance of payment equilibrium on the current account allow?

A

Sustainable financing of the current account

This is important for long-term growth.

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6
Q

Fill in the blank: The government aims for _______ to ensure the national debt does not escalate.

A

Balance government budget

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7
Q

What is the aim of protecting the environment as a macroeconomic objective?

A

Provide long run environmental stability

Ensures resources are used sustainably and minimizes pollution.

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8
Q

What is the goal of greater income equality?

A

Minimise the gap between the rich and poor

It is generally associated with a fairer society.

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9
Q

What are demand-side policies designed to manipulate?

A

Consumer demand

They include expansionary and deflationary policies.

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10
Q

What is the purpose of expansionary policy?

A

Increase AD to bring about growth

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11
Q

What does fiscal policy use to manipulate aggregate demand?

A
  • Borrowing
  • Government spending
  • Taxation

It aims to improve macroeconomic performance.

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12
Q

How do interest rates affect aggregate demand?

A

A rise in interest rates increases the cost of borrowing, leading to a fall in investment and consumption

This reduces aggregate demand.

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13
Q

What is quantitative easing?

A

When the Bank of England buys assets to increase money supply

It aims to stimulate demand during low economic activity.

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14
Q

What are two main ways the government can increase AD through fiscal policy?

A
  • A rise in income tax decreases disposable income
  • A rise in government spending increases AD
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15
Q

What is a budget deficit?

A

When the government spends more money than it receives

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16
Q

What type of tax is income tax?

A

Direct tax

It is the biggest source of revenue for the government.

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17
Q

What is the standard rate of VAT in the UK?

A

20%

Not all goods are charged at this rate.

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18
Q

True or False: High interest rates over a long period of time encourage investment.

A

False

They discourage investment and decrease long-run aggregate supply.

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19
Q

What is the main aim of the Monetary Policy Committee (MPC)?

A

Keep inflation at 2%

They monitor CPI to assess whether the target is met.

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20
Q

What happens when the economy is at full employment and AD increases?

A

It leads to higher prices

If unemployment is very high, it can lead to higher output.

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21
Q

What is the impact of fiscal policy dependent on?

A

The multiplier

A larger multiplier results in a bigger impact on AD.

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22
Q

What is one problem with demand-side policies?

A

They can be inflationary when expansionary

Deflationary policies may lead to increased unemployment.

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23
Q

What happens to prices when the economy is at full employment and there is a rise in AD?

A

Only higher prices occur.

This indicates inflationary pressures in a fully employed economy.

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24
Q

What is the effect of a rise in AD when unemployment is very high?

A

Only higher output occurs.

This suggests that increased demand can lead to job creation in a high unemployment scenario.

25
Q

What is a significant issue of demand-side policies?

A

Expansionary policy is inflationary while deflationary policy brings unemployment.

This reflects the trade-off faced by governments in managing demand.

26
Q

Which type of policy is argued to be more effective at targeting specific groups and reducing poverty?

A

Fiscal policy.

Fiscal policy can increase benefits to boost AD and reduce inequality.

27
Q

What was a major consequence of the Great Depression in the UK?

A

Unemployment was over 15%.

The Great Depression had a severe impact on many sectors, particularly primary and manufacturing industries.

28
Q

What event triggered the Great Depression?

A

The Wall Street Crash of 1929.

This crash led to a significant fall in share prices and a loss of confidence.

29
Q

What was one cause of the Great Depression related to consumer behavior?

A

Loss of consumer and business confidence.

This led to reduced investment and a downward spiral in AD.

30
Q

How did the US banking system contribute to the Great Depression?

A

Banks had lent too much during the 1920s, creating an unsustainable boom.

The failure of banks post-crash further decreased confidence and reduced loans.

31
Q

What was the effect of protectionism during the Great Depression?

A

It reduced world trade, decreasing AD and lowering confidence.

The Smoot-Hawley Tariff Act of 1930 exemplified this protectionist approach.

32
Q

What was the UK’s response to the Great Depression regarding the budget?

A

Belief that balancing the government budget was key to recovery.

This led to cuts in public sector wages and unemployment benefits.

33
Q

What significant action did the UK take on September 21, 1931?

A

The UK was forced to leave the gold standard.

This allowed the Bank of England to cut interest rates and increase AD.

34
Q

What was a key feature of Franklin Roosevelt’s New Deal?

A

Public sector investment and work schemes for the unemployed.

This represented a shift towards Keynesian fiscal policy in the USA.

35
Q

What was the primary cause of the Global Financial Crisis of 2008/9?

A

Issues in mortgage lending in the USA.

These issues included the rise of sub-prime mortgages and moral hazard.

36
Q

What happened when banks stopped lending to each other during the Global Financial Crisis?

A

There was a fall in confidence among banks.

This led to a liquidity crisis and panic in the financial system.

37
Q

What was a common policy response to the financial crises in both the UK and the USA?

A

Nationalisation of banks and building societies.

This was done to stabilize the banking system and protect savers.

38
Q

What are supply-side policies aimed at?

A

Increasing the productive potential of the economy.

These policies move the supply curve to the right, enhancing economic growth.

39
Q

What distinguishes market-based policies from interventionist policies?

A

Market-based policies remove barriers to free market efficiency, while interventionist policies correct market failures.

This reflects differing economic philosophies about government involvement.

40
Q

What is one way to increase incentives for employment?

A

Reducing benefits or taxes.

This can help prevent the poverty/unemployment trap.

41
Q

How can competition be promoted through government policy?

A

By privatisation and deregulation.

These actions aim to create a more competitive market environment.

42
Q

What can be a consequence of setting the minimum wage above the equilibrium level?

A

Increased unemployment.

This occurs because employers may not be able to afford to hire as many workers.

43
Q

What is one method to improve the quality of the labor force?

A

Increasing spending on education and training.

This leads to a more skilled workforce capable of producing more goods and services.

44
Q

What is the impact of increased spending on education and training?

A

Creates a more educated workforce, increases efficiency, and allows for more skilled jobs.

This could include free university tuition and improved on-the-job training.

45
Q

What are T-Levels?

A

An A Level equivalent focused on technical education introduced by the government.

Aimed at improving technical skills in the workforce.

46
Q

What is the purpose of the Apprenticeship Levy?

A

A tax on salaries in large companies to fund employee training.

However, its effectiveness has been questioned due to falling quality and numbers of apprenticeships.

47
Q

How can high-skilled migrants improve the workforce?

A

By filling skills shortages and addressing unfilled vacancies in the job market.

The UK has around 800,000 unfilled vacancies due to skill mismatches.

48
Q

What is a potential downside to improving education?

A

It may incur opportunity costs and may take time to yield results.

Increased education may not align with workforce needs.

49
Q

What is one way the government could improve infrastructure?

A

By offering tax incentives or subsidies on business investment.

Example includes reducing corporation tax to encourage investment.

50
Q

What is the current investment level in the UK compared to South Korea?

A

17% of GDP in the UK compared to 35% in South Korea.

This indicates a need for increased investment in the UK.

51
Q

What are some government actions to improve infrastructure?

A

Building new roads, HS2, CrossRail, and the Transforming Cities Fund.

These projects aim to enhance transportation and connectivity.

52
Q

What are supply-side policies designed to do?

A

Increase output and decrease prices in the long term.

They focus on improving the economy’s productive capacity.

53
Q

What is the Phillips curve?

A

A concept showing the trade-off between inflation and unemployment.

Initially suggested that lower unemployment leads to higher inflation.

54
Q

What is stagflation?

A

A situation of high unemployment and low inflation.

This phenomenon challenged the validity of the Phillips curve in the 1970s.

55
Q

What are the trade-offs between economic growth and environmental protection?

A

Economic growth can lead to resource depletion and pollution.

Examples include rapid growth in China leading to serious pollution issues.

56
Q

What is the relationship between expansionary fiscal policies and inflation?

A

Expansionary policies increase AD, leading to higher inflation.

They can also worsen the balance of payments by increasing imports.

57
Q

What is the effect of high interest rates on long-term investment?

A

High interest rates can discourage investment and decrease long-term growth.

They also tend to raise the value of the currency, impacting exports.

58
Q

What is a consequence of reducing government spending to address fiscal deficits?

A

It can lead to decreased AD, lower economic growth, and higher unemployment.

Moreover, it may disproportionately affect low-income individuals.

59
Q

True or False: Supply-side policies can lead to short-term inflation.

A

True.

If they encourage investment, they may increase aggregate demand.

Y1 Macro (6 decks)

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