2.6 Macroeconomic Objectives and Policies Flashcards
What are the seven macroeconomic objectives of the government?
Low and Stable inflation
Low Unemployment
Economic Growth
Low income inequality
Balance of Payments equilibrium
Environmental Sustainment
Balanced Government Budget
What is the difference between expansionary and contraction policies?
They are both demand side policies, but expansionary policies aim to increase aggregate demand and contractionary policies aim to reduce aggregate demand to control inflation
What is the difference between monetary and fiscal policy?
Monetary policy is where the central bank or regulatory authorities use interest rates or QE measures, but Fiscal policy is when the budget is manipulated to bring change economic performance.
What are the four ways high interest rates reduce AD?
Consumers pay back on their loans so they have less disposable income
The negative wealth effect occurs as less people are buying stocks and shares so asset prices fall
Confidence falls
Exchange rate increases so exports are more expensive so net trade falls
What are the disadvantages of using interests rates to influence AD? 4
They have a large time lag
They can cause a large balance of trade deficit
They cannot go below zero
Sustained high interest rates leads to a reduction in LRAS
What is quantitive easing?
This is a method the central bank uses to increase liquidity in the economy.
What are the three ways in which quantitive easing works?
As the central bank buys up assets, there is an increase in demand for assets, causing the wealth effect which stimulates consumption
As the central bank buys up assets, there is more liquidity in the economy which promotes spending
As the central bank buys up assets, commercial banks are able to give out loans at lower rates as they may be having some costs covered by the government.
What are the three disadvantages of using quantitive easing?
It can lead to hyperinflation
It is only meant to be a temporary solution and can cause overreliance on it
it can lead to growing inequality, as only high income households hold assets so they may the only ones experiencing an increase in liquidity
What is a budget deficit?
When government spending exceeds tax revenue.
What are the disadvantages of using fiscal policy?
Fiscal policy can cause an increase in inequality
It can also affect LRAS as it can lead to a fall in quantity and quality of education/healthcare
Governments are also influenced by political motives so will not wish too implement socially unpopular policies
The effect it has is also dependent on the multiplier
What are disadvantages of demand side policies?
A classical economist would argue that in the long run output is fixed so any effect would be purely inflationary
A keynesian economist would argue it depends on the state the economy is in, as if it is operating at full capacity, any effect will be purely inflationary
They have large time lags
Expansionary leads to inflation, Contractionary leads to unemployment
What caused the Great Depression?
A crash in the US stock market in 1929 meant there was low consumer and firm confidence. In addition, leading up to this banks had been giving out unreasonable loans which caused an unsustainable boom. Also, America used protectionist measures such as tariffs which lead to a major fall in exports of major trading partners. Also, the UK rejoined the Gold Standard (a concept they left behind in 1914) at the rate they left at, which meant they had a majorly undervalued currency which lead to a major overvaluing which meant UK exports fell
What caused The Financial Crisis?
The Financial Crisis was caused by too many mortgages given out to those who were unlikely to pay this back. At this time it caused a bubble in the housing market as mortgages were being bundled and sold at value higher than they were worth. When this was discovered, consumer confidence fell and major banks such as Lehman Brothers collapsed and others requiring bailout such as the RBS and Lloyds Banks
What are supply side policies?
Policies which aim to increase the productive potential of the economy.
What is the difference between interventionist and market based policies?
Interventionist policies aim to reduce market failure whereas market based policies aim to get rid of anything which is preventing the free market from working efficiently.
What are the five types of supply side policies?
Increasing incentives
Reforming the labour market
Improving infrastructure
Increasing the quality of the workforce
Promote Competition
What are the four ways governments can increase incentives?
Reduce taxes/ benefits
Reduce NI contributions for firms
manipulate minimum wage
Give non monetary benefit (more days off)
What are the three disadvantages of increasing benefits?
The scale of the change matters as it often can’t be too large in the long term
They reduce the government revenue
They are regressive
How can the government increase competition?
They can privatize companies and give power to authorities such as the CMA
What are the disadvantages of increasing competition?
It can cause poorer quality service and a disregard for the environment
What are the six ways the labour market can be reformed?
Increasing the retirement age
Giving less power to trade unions
Reducing unemployment benefits
Manipulating the minimum wage
Changing employment contracts (zero hour)
Increasing the mobility of labour
What are the disadvantages of labour market reforms?
Trade unions already have little power
It can increase income inequality greatly
It can reduce the satisfaction of workers as they seem less secure in their job so the quality of goods and services falls
What are the three ways the workforce can be more skilled?
Increased in high skilled migrants entering the country
Introducing regulation which makes employers continuously train their workers
Improve the quality of education
What are the disadvantages of making the workforce less skilled
Education doesn’t correlate to higher wages
Very large opportunity cost and time lag
What three the ways the government can improve infrastructure?
Building more infrastructure projects
Providing tax breaks and subsidies towards investment
Investing in technology and improving the quality of it
What are the issues with trying to improve infrastructure?
It can negatively affect the government budget
Firms may use it as a means for tax avoidance
There is no guarantee firms will use any subsidy given to them for technology developments
Investing into technology doesn’t guarantee and improvement in it
What are four general advantages of supply side policies?
They can increase output and reduce prices at the same time
They offer long term increases in economic growth compared to short term shifts in AD
They can improve the balance of payments
There are two approaches that economists can take
What are the five disadvantages of supply side policies?
If the Keynesian graph is elastic supply side policies will have little to no effect on price or output
It can have adverse effects on AD causing inflation to rise etc
It has a large time lag
it can cause a budget deficit
They can be ineffective
What are some economic objectives trade offs?
Economic growth and Environmental protection
Economic Growth and Balance of Payments
Unemployment and Inflation
What does the Phillips curve show?
As the cost of wages for firms increases, as a result of greater employment, the price level in the economy rise
