2.6 Macroeconomic Objectives And Policies Flashcards
What are the four key macroeconomic objectives of the government?
- 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.
What is the long run trend of economic growth in the UK?
About 2.5%
Governments aim for sustainable economic growth over the long run.
What unemployment rate does the government aim for?
Around 3%
This accounts for frictional unemployment.
What is the government target for inflation in the UK?
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.
What does the balance of payment equilibrium on the current account allow?
Sustainable financing of the current account
This is important for long-term growth.
Fill in the blank: The government aims for _______ to ensure the national debt does not escalate.
Balance government budget
What is the aim of protecting the environment as a macroeconomic objective?
Provide long run environmental stability
Ensures resources are used sustainably and minimizes pollution.
What is the goal of greater income equality?
Minimise the gap between the rich and poor
It is generally associated with a fairer society.
What are demand-side policies designed to manipulate?
Consumer demand
They include expansionary and deflationary policies.
What is the purpose of expansionary policy?
Increase AD to bring about growth
What does fiscal policy use to manipulate aggregate demand?
- Borrowing
- Government spending
- Taxation
It aims to improve macroeconomic performance.
How do interest rates affect aggregate demand?
A rise in interest rates increases the cost of borrowing, leading to a fall in investment and consumption
This reduces aggregate demand.
What is quantitative easing?
When the Bank of England buys assets to increase money supply
It aims to stimulate demand during low economic activity.
What are two main ways the government can increase AD through fiscal policy?
- A rise in income tax decreases disposable income
- A rise in government spending increases AD
What is a budget deficit?
When the government spends more money than it receives
What type of tax is income tax?
Direct tax
It is the biggest source of revenue for the government.
What is the standard rate of VAT in the UK?
20%
Not all goods are charged at this rate.
True or False: High interest rates over a long period of time encourage investment.
False
They discourage investment and decrease long-run aggregate supply.
What is the main aim of the Monetary Policy Committee (MPC)?
Keep inflation at 2%
They monitor CPI to assess whether the target is met.
What happens when the economy is at full employment and AD increases?
It leads to higher prices
If unemployment is very high, it can lead to higher output.
What is the impact of fiscal policy dependent on?
The multiplier
A larger multiplier results in a bigger impact on AD.
What is one problem with demand-side policies?
They can be inflationary when expansionary
Deflationary policies may lead to increased unemployment.
What happens to prices when the economy is at full employment and there is a rise in AD?
Only higher prices occur.
This indicates inflationary pressures in a fully employed economy.
What is the effect of a rise in AD when unemployment is very high?
Only higher output occurs.
This suggests that increased demand can lead to job creation in a high unemployment scenario.
What is a significant issue of demand-side policies?
Expansionary policy is inflationary while deflationary policy brings unemployment.
This reflects the trade-off faced by governments in managing demand.
Which type of policy is argued to be more effective at targeting specific groups and reducing poverty?
Fiscal policy.
Fiscal policy can increase benefits to boost AD and reduce inequality.
What was a major consequence of the Great Depression in the UK?
Unemployment was over 15%.
The Great Depression had a severe impact on many sectors, particularly primary and manufacturing industries.
What event triggered the Great Depression?
The Wall Street Crash of 1929.
This crash led to a significant fall in share prices and a loss of confidence.
What was one cause of the Great Depression related to consumer behavior?
Loss of consumer and business confidence.
This led to reduced investment and a downward spiral in AD.
How did the US banking system contribute to the Great Depression?
Banks had lent too much during the 1920s, creating an unsustainable boom.
The failure of banks post-crash further decreased confidence and reduced loans.
What was the effect of protectionism during the Great Depression?
It reduced world trade, decreasing AD and lowering confidence.
The Smoot-Hawley Tariff Act of 1930 exemplified this protectionist approach.
What was the UK’s response to the Great Depression regarding the budget?
Belief that balancing the government budget was key to recovery.
This led to cuts in public sector wages and unemployment benefits.
What significant action did the UK take on September 21, 1931?
The UK was forced to leave the gold standard.
This allowed the Bank of England to cut interest rates and increase AD.
What was a key feature of Franklin Roosevelt’s New Deal?
Public sector investment and work schemes for the unemployed.
This represented a shift towards Keynesian fiscal policy in the USA.
What was the primary cause of the Global Financial Crisis of 2008/9?
Issues in mortgage lending in the USA.
These issues included the rise of sub-prime mortgages and moral hazard.
What happened when banks stopped lending to each other during the Global Financial Crisis?
There was a fall in confidence among banks.
This led to a liquidity crisis and panic in the financial system.
What was a common policy response to the financial crises in both the UK and the USA?
Nationalisation of banks and building societies.
This was done to stabilize the banking system and protect savers.
What are supply-side policies aimed at?
Increasing the productive potential of the economy.
These policies move the supply curve to the right, enhancing economic growth.
What distinguishes market-based policies from interventionist policies?
Market-based policies remove barriers to free market efficiency, while interventionist policies correct market failures.
This reflects differing economic philosophies about government involvement.
What is one way to increase incentives for employment?
Reducing benefits or taxes.
This can help prevent the poverty/unemployment trap.
How can competition be promoted through government policy?
By privatisation and deregulation.
These actions aim to create a more competitive market environment.
What can be a consequence of setting the minimum wage above the equilibrium level?
Increased unemployment.
This occurs because employers may not be able to afford to hire as many workers.
What is one method to improve the quality of the labor force?
Increasing spending on education and training.
This leads to a more skilled workforce capable of producing more goods and services.
What is the impact of increased spending on education and training?
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.
What are T-Levels?
An A Level equivalent focused on technical education introduced by the government.
Aimed at improving technical skills in the workforce.
What is the purpose of the Apprenticeship Levy?
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.
How can high-skilled migrants improve the workforce?
By filling skills shortages and addressing unfilled vacancies in the job market.
The UK has around 800,000 unfilled vacancies due to skill mismatches.
What is a potential downside to improving education?
It may incur opportunity costs and may take time to yield results.
Increased education may not align with workforce needs.
What is one way the government could improve infrastructure?
By offering tax incentives or subsidies on business investment.
Example includes reducing corporation tax to encourage investment.
What is the current investment level in the UK compared to South Korea?
17% of GDP in the UK compared to 35% in South Korea.
This indicates a need for increased investment in the UK.
What are some government actions to improve infrastructure?
Building new roads, HS2, CrossRail, and the Transforming Cities Fund.
These projects aim to enhance transportation and connectivity.
What are supply-side policies designed to do?
Increase output and decrease prices in the long term.
They focus on improving the economy’s productive capacity.
What is the Phillips curve?
A concept showing the trade-off between inflation and unemployment.
Initially suggested that lower unemployment leads to higher inflation.
What is stagflation?
A situation of high unemployment and low inflation.
This phenomenon challenged the validity of the Phillips curve in the 1970s.
What are the trade-offs between economic growth and environmental protection?
Economic growth can lead to resource depletion and pollution.
Examples include rapid growth in China leading to serious pollution issues.
What is the relationship between expansionary fiscal policies and inflation?
Expansionary policies increase AD, leading to higher inflation.
They can also worsen the balance of payments by increasing imports.
What is the effect of high interest rates on long-term investment?
High interest rates can discourage investment and decrease long-term growth.
They also tend to raise the value of the currency, impacting exports.
What is a consequence of reducing government spending to address fiscal deficits?
It can lead to decreased AD, lower economic growth, and higher unemployment.
Moreover, it may disproportionately affect low-income individuals.
True or False: Supply-side policies can lead to short-term inflation.
True.
If they encourage investment, they may increase aggregate demand.
