2.6 MEOs and Policies

Question 1

What are the four key macroeconomic objectives of governments?

Answer 1

• Economic growth
• Low unemployment
• Low and stable inflation
• Balance of payment equilibrium on the current account

Question 2

What is the long run trend of economic growth in the UK?

Answer 2

About 2.5%

Question 3

What unemployment rate do governments typically aim for in the UK?

Answer 3

Around 3%

Question 4

What is the government’s inflation target in the UK?

Answer 4

2%, measured by CPI

Question 5

What happens if the inflation rate falls 1% outside the target?

Answer 5

The Governor of the Bank of England must write a letter to the Chancellor of the Exchequer

Question 6

What is one of the macroeconomic objectives related to government budgets?

Answer 6

Balance government budget

Question 7

What does the protection of the environment aim to ensure?

Answer 7

Long run environmental stability and sustainable resource use

Question 8

What is the aim of greater income equality in economic policy?

Answer 8

Minimise the gap between the rich and poor

Question 9

What are demand-side policies designed to manipulate?

Answer 9

Consumer demand

Question 10

What is the focus of expansionary policy?

Answer 10

Increasing aggregate demand (AD) to bring about growth

Question 11

What is the purpose of monetary policy?

Answer 11

To control the level of AD by altering interest rates or the money supply

Question 12

What is the repo rate?

Answer 12

The rate the Bank of England charges for short-term loans to banks

Question 13

How does a rise in interest rates affect AD?

Answer 13

It increases the cost of borrowing, leading to a fall in investment and consumption

Question 14

Fill in the blank: Higher interest rates make _______ more attractive.

Answer 14

savings

Question 15

What is quantitative easing?

Answer 15

When the Bank of England buys assets to increase money supply

Question 16

What is one potential risk of quantitative easing?

Answer 16

It could cause high inflation or hyperinflation

Question 17

What is the role of the Bank of England in monetary policy?

Answer 17

To control monetary policy through the Monetary Policy Committee (MPC)

Question 18

What happens when the government runs a budget deficit?

Answer 18

They spend more money than they receive

Question 19

What is the largest source of revenue for the government in the UK?

Answer 19

Income tax

Question 20

What are direct taxes?

Answer 20

Taxes paid directly to the government by individuals

Question 21

What is the standard rate of VAT in the UK?

Answer 21

20%

Question 22

True or False: A rise in government spending will decrease aggregate demand.

Answer 22

False

Question 23

What do classical economists argue about demand management policies?

Answer 23

They have no effect on long-run output

Question 24

What is a key issue with expansionary policies?

Answer 24

They are often inflationary

Question 25

What do Keynesians argue about the impact of changes in AD?

Answer 25

It depends on the level of unemployment in the economy

Question 26

What is the biggest issue of demand-side policies?

Answer 26

An expansionary policy is inflationary while a deflationary policy brings unemployment

Question 27

What happens if the economy is at full employment and there is a rise in AD?

Answer 27

It will only lead to higher prices.

Question 28

What is the effect of a rise in AD if unemployment is very high?

Answer 28

It will only lead to higher output.

Question 29

What is a significant issue with demand-side policies?

Answer 29

Expansionary policy is inflationary while deflationary policy brings unemployment.

Question 30

What is the main difference between monetary and fiscal policy?

Answer 30

Monetary policy increases demand without increasing government spending.

Question 31

Which policy is more effective at targeting specific groups and reducing poverty?

Answer 31

Fiscal policy.

Question 32

What was the unemployment rate in the UK during the Great Depression?

Answer 32

Over 15%.

Question 33

What event triggered the Great Depression?

Answer 33

The Wall Street Crash of 1929.

Question 34

Name one cause of the Great Depression related to consumer confidence.

Answer 34

Loss of consumer and business confidence.

Question 35

How did the US banking system contribute to the Great Depression?

Answer 35

Banks lent too much during the 1920s and failed to recover after the crash.

Question 36

What was the impact of protectionism during the Great Depression?

Answer 36

It reduced world trade and decreased AD.

Question 37

What was the UK government's position on balancing the budget during the Great Depression?

Answer 37

They believed it was key to recovery.

Question 38

What happened to the pound on September 21, 1931?

Answer 38

The UK was forced to leave the gold standard.

Question 39

What was Franklin Roosevelt's major policy response to the Great Depression?

Answer 39

The New Deal.

Question 40

What was a key similarity between the Great Depression and the Global Financial Crisis?

Answer 40

Both started in the US and spread worldwide.

Question 41

What was a primary cause of the Global Financial Crisis in 2008?

Answer 41

Issues in mortgage lending in the USA.

Question 42

What is negative equity?

Answer 42

When the value of a house is less than the mortgage owed on it.

Question 43

What was the result of banks selling packages of prime and sub-prime mortgages?

Answer 43

Increased risk and spread effects of the housing crash.

Question 44

What did the UK and USA governments do in response to the financial crisis?

Answer 44

Nationalised banks and guaranteed savers' money.

Question 45

What are supply-side policies aimed at?

Answer 45

Increasing the productive potential of the economy.

Question 46

What are market-based policies designed to do?

Answer 46

Remove barriers preventing free market efficiency.

Question 47

What is an example of an interventionist policy?

Answer 47

Government provision of education.

Question 48

How can governments increase incentives for employment?

Answer 48

By reducing benefits or taxes.

Question 49

What is a potential consequence of raising the minimum wage above equilibrium?

Answer 49

Increased unemployment.

Question 50

What is the purpose of competition policy?

Answer 50

To prevent monopolies and ensure market competitiveness.

Question 51

How can the government improve skills in the workforce?

Answer 51

By increasing spending on education and training.

Question 52

What are T-Levels?

Answer 52

An A Level equivalent focusing on technical education.

Question 53

What is one way to create a more educated workforce?

Answer 53

Increase spending on education and training ## Footnote This could include free university tuition or improved on-the-job training.

Question 54

What are T-Levels?

Answer 54

An A Level equivalent focusing on technical education ## Footnote Introduced by the government to improve skills.

Question 55

What is the purpose of the Apprenticeship Levy?

Answer 55

To tax large companies to fund staff training ## Footnote The money is held online for companies to spend on training.

Question 56

What issue has been identified with the Apprenticeship Levy?

Answer 56

Fall in the quality and number of apprenticeships

Question 57

How can an increase in high skilled migrants impact the workforce?

Answer 57

It can improve the quality of the workforce

Question 58

What is a potential downside of improving education?

Answer 58

Opportunity cost as government money may be lost in other sectors

Question 59

What is a proposed method to improve infrastructure?

Answer 59

Offering tax incentives or subsidies on investment ## Footnote Example: Lower tax rates for businesses investing their profits.

Question 60

What is the current investment percentage of GDP in the UK?

Answer 60

17%

Question 61

What does the Enterprise Investment Scheme provide?

Answer 61

Tax relief for individuals buying shares in small companies for investment purposes

Question 62

What are some government actions to improve infrastructure?

Answer 62

Building new roads, HS2, CrossRail, Transforming Cities Fund

Question 63

What is one benefit of improved technology in production?

Answer 63

Production becomes more efficient, requiring fewer resources

Question 64

What are the two types of supply-side policies?

Answer 64

Market-based and interventionist

Question 65

True or False: Supply-side policies can lead to both increased output and decreased prices.

Answer 65

True

Question 66

What does the Keynesian LRAS curve indicate about supply-side policies?

Answer 66

They have no impact when LRAS is elastic

Question 67

What is the trade-off between economic growth and environmental protection?

Answer 67

Economic growth can lead to resource use, pollution, and habitat destruction

Question 68

What is the relationship between economic growth and the balance of payments?

Answer 68

Rapid growth can lead to balance of payments problems if domestic demand increases imports

Question 69

What did A. W. Phillips find regarding inflation and unemployment?

Answer 69

A trade-off between inflation and unemployment exists, known as the Phillips curve

Question 70

What happens with expansionary fiscal policies?

Answer 70

They increase AD, output, employment, and economic growth but may lead to increased inflation

Question 71

What is a consequence of high interest rates?

Answer 71

They may damage long-term investment and decrease long-term growth

Question 72

Fill in the blank: Supply-side policies intend to increase _______.

Answer 72

aggregate supply

Question 73

What is one potential negative effect of reducing government spending to address fiscal deficits?

Answer 73

It may decrease short-term economic growth and increase unemployment

Question 74

What might happen if fiscal measures lead to a fall in output?

Answer 74

Higher fall in tax revenues, making the policy ineffective