2.6 MARCOECONOMIC OBJECTIVES AND POLICIES Flashcards
macroeconomic objectives
-growth should be strong, sustained, sustainable
-low unemployment, full employment
-inflation, low and stable (2% in the uk)
-balanced trade (trade deficit and trade surplus are both bad)
-distribution of income to be fair (normative consideration)
TIGERS
TRADE
INFLATION
GROWTH
EMPLOYMENT
REDISTRIBUTION OF INCOME
STABILITY
macroeconomic indicators
-growth
-unemployment
-inflation
-trade
-distribution of income
Fiscal Policy
Changes to government spending and taxation in order to influence AD
what does Expansionary fiscal policy do (increase in AD) (very much a Keynesian idea)
-Increase economic growth
-reduce unemployment
-increase demand pull inflation, (if below target)
-reduce income inequality
expansionary fiscal policy examples
1)reduction in income tax
2)reduction in corporation tax
3)increase in government spending
how does expansionary fiscal policy affect LRAS
1)reduction in income tax (encourages people outside the employment force to enter the employment force)
2)reduction in corporation tax (investment also boosts LRAS by increasing quality and quantity of capital goods)
3)increase in government spending (boost productivity of labour, or boost productive efficiency)
cons of expansionary fiscal policy
-Demand pull inflation
-current account deficit
-worsening of government finances (increase in national debt as they will not get funding)
-x inefficiency, (government spending could be wasteful)
-Time lags
evaluation of expansionary fiscal policy
-size of output gap (if the economy is close to to full employment then expansionary fiscal policy will have a small effect, whereas in a recession it will have a greater effect)
-size of multiplier (if the multiplier effect is large then there will be further effects of spending and income growth further than Yfe)
-consumer/business confidence (may save instead of investing)
-state of government finances
what does Contractionary fiscal policy do (decrease in AD)
-Reduce inflation
-Reduce budget deficit, national debt
-redistribute income
-reduce current account deficit
Monetary Policy
changes to interest rates, the money supply and the exchange rate by the central bank in order to influence AD
what do Expansionary monetary policy aim to do (policies to increase AD)
1) Increase inflation
2)Increase growth
3)Reduce unemployment
Interest rates
-when interest rates fall, the rate of return on savings will fall
-interest rate cuts will work through various channels affecting various factors of the AD equation
-central bank interest rates
-the central bank will cut interest rates (expansionary policy) leading to lower credit card interest rates (lower borrowing costs for consumers) makes it cheaper to borrow and make consumption easier
effects of different interest rate cuts
-saving rates can be cut leading to a reduced incentive to save leading to increased consumption
-mortgage rates will come down meaning consumers will pay less monthly for their mortgage leading to an increase in disposable income increasing their marginal propensity to consume leading to an increase in consumption
-rates on business loans will mean the cost for businesses to borrow will be less meaning they will be able to invest more
-lower interest rates would lead to a weakened exchange rate as they have a lower incentive to save as interest rates are lower, so they will move their money out of a country
issues of expansionary monetary policy
Demand pull inflation
current account deficits
keynsian - liquidity trap, when interest rates hit their lower bound then consumers and producers will liquidate their money into cash to hoard it so it will be unaffected
-negative impact on savers, when rate of return on savings will be less than the rate of inflation in the economy, less savings mean living standards will fall
-time lags, takes a long time for an interest rate cut to cause an effect (around 18 months)
evaluation of expansionary monetary policy
-size of output gap
-consumer confidence, people need confidence in their jobs so they will be more incentivised to borrow and spend
-business confidence, businesses need more confident in the future of the economy in order to borrow and invest
-banks willingness to lend (if the banks are unwilling to lend then the interest rate cut will be pointless, as they are unconfident in the economy)
-banks pass on interest cuts, )the banks may not lend the full amount of money leading to a less increase in AD than expected
What do Contractionary monetary policy do? (Policies to decrease AD)
1) reduce inflation
2)prevent asset/credit bubbles
3)reduce excess debt or promote savings
4) reduce current account deficit
Supply side policies
Policies designed to increase the productive cpcaity of the economy, shifting LRAS to the right
-if successful, all 4 main macroeconomic objectives will improve
Interventionist supply side policies
-government spending on education/training
-government spending on infrastructure
-subsidies to firms to promote investment
market based supply side policies
tax reform
-lower income tax
-lower corporation tax
labour market reform
-reduce benefits
-reduce minimum wages
-reduce trade union power
competition policy
-privatisation
-deregulation
-trade liberalisation
cons/evaluation of supply side policies
-no guarantee of success
-costly
-time lags
-negative stakeholder impacts
-output gap
-need for targeted supply side policies
