2.6 Macroeconomic Objectives & Policies

Question 1

what is the aim of demand side policies

Answer 1

to shift AD

Question 2

what are the two types of demand side policy

Answer 2

monetary (Bank of England) and fiscal (the Government)

Question 3

what are the two main methods of monetary policy

Answer 3

interest rate adjustments
quantitative easing (QE)

Question 4

what are the two main methods of fiscal policy

Answer 4

government spending
taxation

Question 5

what is a balanced government budget

Answer 5

government revenue = government expenditure

Question 6

what is a government budget deficit

Answer 6

government revenue < government expenditure

Question 7

what is a government budget surplus

Answer 7

government revenue > government expenditure

Question 8

how is a budget deficit financed

Answer 8

public sector borrowing

Question 9

what are direct taxes

Answer 9

taxes on income and profits paid directly to the government by an individual or firm

Question 10

what are indirect taxes

Answer 10

taxes imposed on spending paid by the supplier

Question 11

what is the purpose of expansionary or contractionary demand-side policies

Answer 11

to increase or decrease AD

Question 12

what are the main expansionary demand-side policies

Answer 12

reducing taxes
decreasing interest rates
increasing government spending
increasing QE

Question 13

what are the main contractionary demand-side policies

Answer 13

increasing taxes
increasing interest rates
decreasing government spending
decreasing/stopping QE (QT)

Question 14

what do the Bank of England’s Monetary Policy Committee (MPC) do

Answer 14

meet 8 times a year to set monetary policy, discussing QE and the Bank Rate. However it can take up to 2 years to see the effects of their changes

Question 15

what is the Bank of England’s inflation target

Answer 15

2%

Question 16

what influences the decisions made by the MPC

Answer 16

state of the economy
real GDP growth
CPI inflation
interest rate elasticity
state of the property market
unemployment rates
business/consumer confidence
exchange rates

Question 17

what are the strengths of monetary policy

Answer 17

the Bank of England operates independently of the government
can consider long-term outlook
targets inflation and maintains stable prices
depreciating currency can increase exports

Question 18

what are the weaknesses of monetary policy

Answer 18

time lags between policies implemented and effects
less effective when in a negative output gap (when confidence is low)
cheaper credit can cause inflation long-term

Question 19

what are the strengths of fiscal policy

Answer 19

spending can be targeted on specific industries
shorter time lags to become effective
promotes equality through taxation
increased consumption of public goods
increase in LRAS

Question 20

what are the weaknesses of fiscal policy

Answer 20

policies can change rapidly as governing parties change
increased government spending can create a budget deficit, which may lead to austerity in future
crowding out
time lags/information failure

Question 21

what are the two types of supply-side policies

Answer 21

interventionist and market-based

Question 22

what are interventionist supply-side policies based on

Answer 22

government intervention in order to increase full employment (Yfe)

Question 23

what are market-based supply-side policies based on

Answer 23

removing obstructions in the free market

Question 24

what are the three aims of market-based supply-side policies

Answer 24

increase incentives
promote competition
reform the labour market

Question 25

how do market-based supply-side policies increase incentives

Answer 25

reducing income/corporation tax restructuring unemployment benefits to incentivise the unemployed to seek work

Question 26

how do market-based supply-side policies promote competition

Answer 26

privatisation & deregulation trade liberalisation

Question 27

how do market-based supply-side policies reform the labour market

Answer 27

decreasing trade union power so wages can be decreased decreasing minimum wages to lower costs of production

Question 28

what are the four aims of interventionist supply-side policies

Answer 28

promote competition reform the labour market improve the skills and quality of the labour force improve infrastructure

Question 29

how do interventionist supply-side policies promote competition

Answer 29

increased government spending on innovation subsidies to firms promotes international competitiveness

Question 30

how do interventionist supply-side policies reform the labour market

Answer 30

increased government spending on improving occupational mobility

Question 31

how do interventionist supply-side policies improve the skills and quality of the labour market

Answer 31

increased government spending on education and training increased government spending on healthcare

Question 32

how do interventionist supply-side policies improve infrastructure

Answer 32

increased government spending on infrastructure

Question 33

what are the strengths of supply-side policies

Answer 33

increase the rate of growth in an economy reduce average price levels reduce unemployment increase value of net exports can improve quality of life for citizens

Question 34

what are the weaknesses of supply-side policies

Answer 34

worsens inequality expensive to implement significant time lags between expenditure and results changes in government may change/reverse long-term plans

Question 35

what is the role of automatic stabilisers in a recession

Answer 35

government spending increases - more benefits and transfer payments/job seeking allowances) taxation decreases - less direct and indirect taxes

Question 36

what is the role of automatic stabilisers in a boom

Answer 36

government spending decreases - less benefits and transfer payments taxation increases - more direct and indirect taxes

Question 37

what is the Keynesian view on output gaps

Answer 37

government action IS required

Question 38

what is the classical view on output gaps

Answer 38

no government action required

Question 39

what are the objectives of expansionary demand-side policies

Answer 39

boost growth reduce unemployment increase inflation redistribute income

Question 40

what are the objectives of contractionary demand-side policies

Answer 40

reduce inflation reduce budget deficit/national debt redistribute income reduce current account deficit

Question 41

how did the USA use fiscal policy in the Great Depression

Answer 41

Roosevelt's New Deal provided lots of government spending on infrastructure (Keynesian approach to increase AD) the government employed lots of people and started big construction projects such as The Golden Gate Bridge and Hoover Dam protectionism increased to increase domestic production and consumption entry into WWII boosted government spending

Question 42

how did the USA use monetary policy in the Great Depression

Answer 42

the Federal Reserve cut the bank rate from 6% to 4%, although this was then raised again later the same year to strengthen the exchange rate. this was a contractionary monetary policy

Question 43

how did the UK use fiscal policy in the Great Depression

Answer 43

the government prioritised a balanced budget with contractionary policies to avoid crowding out cut public sector wages and unemployment benefits, which further reduced consumption and confidence raised income tax which decreased disposable income and confidence introduced a 10% tariff on all non-British colony imports to increase production and consumption domestically

Question 44

how did the UK use monetary policy in the Great Depression

Answer 44

stopped using the gold standard which had appreciated the Pound the Pound depreciated by 25% which increased exports and thus AD Bank Rate lowered from 6% to 2% which increased AD

Question 45

how did the USA use fiscal policy in the 2008 Financial Crisis

Answer 45

Keynesian approach with lots of government spending and expansionary fiscal policy banks were supported by the government government acts that injected vast amounts of money into the economy which increased AD

Question 46

how did the USA use monetary policy in the 2008 Financial Crisis

Answer 46

Bank Rates were cut from 5.25% to 0.25% three rounds of QE injected trillions into the money supply

Question 47

how did the UK use fiscal policy in the 2008 Financial Crisis

Answer 47

Keynesian approach with significant government spending and expansionary fiscal policy banks were supported by the government tax cuts injections and investment later a switch from expansionary fiscal policy to austerity this delayed the recoveryh

Question 48

how did the UK use monetary policy in the 2008 Financial Crisis

Answer 48

Bank Rates were cut from 5.75% to 0.5% several rounds of QE took place, putting more money in the money supply