2.6 Macroeconomic objectives and policies LS11-14 Flashcards
What are the government’s four key macroeconomic objectives?
- Economic growth (sustainable)
- Low unemployment (~3%)
- Low and stable inflation (~2%)
- Balance of payment equilibrium
What are the government’s other macroeconomic objectives?
Not the main 4
- Balanced fiscal budget
- Protection of the environment
- Greater income equality
Monetary policy?
- The manipulation of monetary variables such as interest rates and the money supply to achieve macroeconomic objectives
Fiscal policy?
- The use of taxes, government spending and borrowing to achieve macroeconomic objectives
How do interest rates affect the housing market?
- ↓ IR = ↓ mortgage repayments = houses more affordable
- People encouraged to buy a house = ↑ AD (↑ consumption of furniture etc, ↑ investment)
How do interest rates influence the wealth effect?
- ↓ IR = ↑ asset prices (e.g. ↑ demand for housing) = asset owners/ homeowners wealthier = ↑ consumer confidence
How do interest rates affect saving?
- ↑ IR = saving more attractive due to ↑ return
How do interest rates affect investment?
- ↓ IR = ↑ investment
How do interest rates affect the exchange rate?
- ↓ IR = saving less attractive to foreign investors = ↓ demand for currency = ↓ value of currency
Quantitative easing?
- The introduction of new money into the national supply by a central bank
How does QE work?
- Central bank digitally creates money
- Central bank purchases financial assets from banks and other financial institution - ↑ demand for financial assets = wealth effect
- Banks and other financial institutions have more money = more willing to lend
ALL TO ↑ AD!
Direct vs indirect tax?
- Direct - levied directly on an individual or organisation
- Indirect - levied on a good or service
Expansionary fiscal policy?
- Changes to taxation and/or government spending that aim to increase AD
However, effectiveness depends on size of multiplier
Contractionary fiscal policy?
- Changes to taxation and/or government spending that aim to reduce AD
Leads to a fall in the budget deficit/rise in budget surplus
Expansionary monetary policy?
- Monetary policy that aims to increase AD
↓ IR / ↑ money supply
Contractionary monetary policy?
- Monetary policy that aims to reduce AD
↑ IR
Keynesian vs Classical economists views on demand-side policies?
- Keynesian economists believe **fiscal and monetary **should be used when economy is in recession/growing too fast
- Classical economists believe only monetary should be used (believe fiscal policies are ineffective)
Weaknesses of demand-side policies?
- Conflicting objectives (budget deficit with ↑ gov spending)
- ↑ National debt
- IR have limited effect (e.g. if already low)
- Depends on size of multiplier
- Time lagged effects
Supply-side policies?
Government policies designed to increase economic growth by improving the macroeconomic performance of individual markets
Market-based SSPs?
- Policies designed to remove barriers to the efficient working of free markets
Interventionist SSPs?
- Policies designed to correct market failure involving government intervention in free markets
Examples of interventionist SSPs?
- Investment in human capital (education + health)
- Investment in new technology
- Investment in infrastructure
- Support for SMEs/infant industries (tax exemptions, loans, subsidies, tariffs etc)
Examples of market-based SSPs?
- Privatisation
- Deregulation
- PFIs/competitive tendering
- Restricting monopoly power
- Trade liberalisation
Basically anything that promotes competition
Weaknesses of SSPs?
- Time lags
- Risk
- No guarantee of success
- Opportunity cost of government finances - burden on budget
- May have -ve impacts on environment
All depend on what specific SSP
What diagram could you use to show the trade-off between unemployment and inflation macroeconomic objectives?
Phillip’s curve!
