2.6 - Macroeconomic Objectives & Policies

Question 1

What are the macroeconomic objectives (7)

Answer 1

Economic growth
Low unemployment
Low and stable rate of inflation
Balance of payments equilibrium on current account
Balanced government budget
Protection of the environment
Greater income equality

Question 2

What do higher interest rates do to investment and consumption

Answer 2

Reduces investment and consumption therefore reduces AD

Question 3

What are the impacts of an interest rate change (decrease) (5)

Answer 3

Housing market booms- positive wealth effect
Consumption increases- multiplier effect
Government spending can increase as borrowing increases
Currency depreciates leading to falling trade deficit
Business investments increase

Question 4

What are issues with changes in interest rates (5)

Answer 4

Balance of trade deficit (exports fall while imports rise)
Changes take up to 2 years to take effect
Interest rates sometimes are too low to be lowered more
Lack of confidence means low interest rates won’t create borrowing
High interest rates for a while decreases LRAS and investment

Question 5

How does quantitative easing work

Answer 5

Central bank creates new money and uses this to purchase bonds. By selling bonds to the central bank, commercial banks or pension funds now have more cash to spend elsewhere in the economy so the new money is injected into the economy. The BoE’s demand for government bonds increases their price, which brings down their yield (return). This means that the pension funds and banks go in search of a higher yield

Question 6

What’s a problem with QE (banks and pension funds)

Answer 6

Pension funds or banks may hoard money or invest it abroad

Question 7

What can QE prevent

Answer 7

The liquidity trap when low interest rates cannot stimulate AD

Question 8

What are issues with QE (4)

Answer 8

Inflationary pressure
Hoarding
Increased demand for 2nd hand goods (doesn’t increase AD)
Some economies are too dependent on it

Question 9

When is QE useful for stimulating the economy

Answer 9

When interest rates are virtually as low as they can go (zero rate bound)

Question 10

What is the BoE’s target

Answer 10

Inflation (price stability) at 2%

Question 11

What caused the Great Depression (1929)

Answer 11

Consumer confidence decreased leading to a downwards AD spiral

Question 12

What were governments’ responses to the Great Depression

Answer 12

Stimulating demand- governments paid out benefits and increased spending in order to increase aggregate demand and move the economy out of a recession
Government expenditure- government spending filtering to the workers through increased employment and wages and improved confidence in the economy