2.6 Mocroeconomic Objectives And Policies

Question 1

What are the 4 possible macroeconomic objectives?

Answer 1

1)Economic growth
2)Low unemployment
3)Low and stable rate of inflation
4)Balance of payments equilibrium on current account

Question 2

What are the 5 variables used to measure national economic performance?

Answer 2

1)Economic growth
2)Unemployment
3)Inflation
4)Balance of payments
5)Redistribution of income

Question 3

What are the key 8 benefits of economic growth?

Answer 3

1)Job creation
2)Rising incomes
3)Improved standard of living
4)Improved international competitiveness of UK economy
5)Multiplier benefits
6)Improved confidence of consumer spending and business investment
7)Lower government spending on job seekers allowance and associated benefits
8)Tax revenues are likely to increase allowing the gov to re-invest

Question 4

Why do governments wish to peruse a policy of low unemployment?

Answer 4

-Unemployment is a waste of resources
-High unemployment is an indicator of poor economic performance
-Economies that have strong economic growth are likely to have low unemployment

Question 5

What are the 8 benefits of low unemployment?

Answer 5

1)Higher consumption and AD
2)Higher incomes
3)Improved standards of living
4)Higher tax revenues for government
5)Lower government spending on unemployment related welfare(benefits, JSA)
6)Improved productivity of UK economy
7)Reduced poverty
8)Social benefits (reduced crime, improved wellbeing)

Question 6

Why is low and stable inflation a policy the government want?

Answer 6

-As high, or rising inflation, damages the real value of money and erodes purchasing power.

Question 7

Why do the governments wish want the balance of payments at equilibrium on the balance of payments?

Answer 7

This is because deficits have to be funded (often by borrowing) which shows a country can’t sustainably finance the current account which will damage long term growth.

Question 8

What are the benefits of importing goods on the economy?

Answer 8

1)it provides consumers with a wider choice of goods, which may be higher quality and lower prices. This enhances consumers standards of living and welfare.
2)Firms may also benefit from cheaper or higher quality imported raw materials, which may reduce costs, either enhancing profits or lowering prices further for customers.

Question 9

What are the 3 other objectives set by the government

Answer 9

1)A balanced government budget
2)Protection of the environment
3)Greater income equality

Question 10

What is a balanced government budget?

Answer 10

One where the government revenue is equal to the government expenditure?

Question 11

How will the government protect the government?

Answer 11

The government will look to develop a sustainable future, particularly for our energy needs. This may involve supporting businesses through the form of investment grants.

Question 12

How will the government create greater income equality?

Answer 12

• progressive taxation(tax brackets)
• welfare programs(unemployment benefits, social security)
• Investments in healthcare and education

Question 13

What is a monetary policy?

Answer 13

The manipulation of the rate of interest, the money supply and exchange rates to influence the level of economic activity.

Question 14

How does the monetary policy work?

Answer 14

Monetary Policy committee meet every month to decide the level of interest rates and any other changes to policy strategy.

Question 15

What is quantitative easing?

Answer 15

A form of expansionary monetary policy where the central bank (BoE) purchases assets like government bonds from the market, increasing the money supply, stimulating economic activity.

Question 16

What is the relationship between Interest rates and Exchange rates?

Answer 16

Increasing IR - Investors move money to the UK due to an increased return on investment - therefore they will have to sell there $ and buy £ to deposit in the UK - Therefore the increased demand for UK pounds increases the exchange rate - This makes exports relatively less price competitive and makes imports more attractive - this will have a worsening effect on the balance of payments.

Question 17

How does the monetary policy affect consumption?

Answer 17

Low interest rates = less incentive to save, more incentive to borrow and therefore higher consumption
Higher interest rates = vice versa

Question 18

How does the monetary policy affect Investment?

Answer 18

Low interest rates = investment becomes less costly and more profitable making it more attractive, so investment should rise
High interest rates = vice versa

Question 19

How does the monetary policy affect Net Exports?

Answer 19

-Low interest rates = weaker pound as less attractive to currency investors
High rates = vice versa

Question 20

If the bank is concerned that slow economic growth is likely feed through to lower inflation they may cut interest rates. How may lower interest rates stunt economic growth?

Answer 20

Lower interest rates reduces the savings ratio and makes borrowing more attractive so consumption rises. This has the effect of increasing real national output from Y to Y1 and there will also be the added benefit of creating employment due to the increased consumption.

Question 21

If the Bank of England is concerned that inflation is running above the 2% target they may increase interest rates to reduce inflationary pressure. How may increasing interest rates reduce inflationary pressure?

Answer 21

Thais makes saving more attractive and will reduce consumption in addition to reducing investment from firms. This has the effect of reducing inflationary pressure as the price falls from P to P1. However, this has come at the expense of a reduction in real national output to Y1, which damages economic growth and employment.

Question 22

How can the monetary policy influence LRAS?

Answer 22

a cut in in interest rates might stimulate business es investment into capital process to improve their productivity and efficiency, which will shift LRAS to LRAS1.

Question 23

What does the effectiveness of the monetary policy depend on?

Answer 23

1)The size of the change in interest rates
2)The size of the multiplier
3)The stage of the economic cycle the economy is at
4)Time lag - How long rate changes take to work
5)Conflict with other objectives

Question 24

How does the effectiveness of the monetary policy depend on the size of the change in interest rates?

Answer 24

This is because a smaller increase in interest rates will encourage people to save less than a larger increase in interest rates. Therefore consumption will only fall slightly and result in a small decrease in AD Which leads to RNO having a small decrease.

Question 25

How does the effectiveness of the monetary policy depend on the size of the multiplier?

Answer 25

This is because if the size of K is smaller, it means the economy has many leakages, and the MPS is greater therefore consumption is smaller leading to a greater fall in AD when IR are increased.

Question 26

How can the effectiveness of the monetary policy depend on the stage of the economic cycle the economy is at?

Answer 26

During a recession when interest rates are near zero, monetary policy may be less effective due to a liquidity trap, where further cuts do not stimulate demand. In contrast, in an economic boom, monetary policy can be more effective in controlling inflation and managing AD

Question 27

How can the effectiveness of the monetary policy depend on time lag?

Answer 27

If there is a shorter lag time then there will be a bigger magnitude fall as the economy can respond more quickly to the policy change and the impact is felt sooner. Longer lag time = vice versa

Question 28

How can the effectiveness of the monetary policy depend on conflict with other objectives

Answer 28

As policies aimed at controlling inflation require a contractionary monetary policy where interest rates are decreased however this makes saving more attractive and consumption decreases resulting in AD decreasing, slowing economic growth down and potentially leading to higher unemployment.

Question 29

What is a fiscal policy?

Answer 29

The manipulation of government spending, taxation and government borrowing to influence the level of economic activity?

Question 30

What objectives are fiscal policies used to achieve?

Answer 30

1)Keep inflation on target 2)Stimulate economic growth and employment during times of recession 3)Maintain a stable economic cycle

Question 31

What are the three expansionary fiscal policies?

Answer 31

1)cutting taxes 2)Raising government spending 3)Increasing the budget deficit

Question 32

How does cutting taxes positively stimulate economic activity?

Answer 32

- A cut in income tax may give consumers more disposable income, thus raising consumption. - A cut in corporation tax may increase available profits for firms which may stimulate investment.

Question 33

How may raising government spending positively stimulate economic activity?

Answer 33

- The government may increase its spending on core infrastructure projects or increase the pay of public sector workers.

Question 34

How may increasing the budget deficit positively stimulate economic activity?

Answer 34

Another way of increasing spending if the government do not wish to raise taxation is to increase borrowing. This can be spent on a variety of projects nationally. However this adds to the national debt, and must be repaid with interest.

Question 35

What are the three contractionary fiscal policies?

Answer 35

1)Increasing taxes 2)Cutting government spending 3)Cutting the budget deficit

Question 36

How may increasing taxes constrain AD, reduce debt or control inflation.

Answer 36

- If income tax is raised this may discourage spending and reduce consumption. - this will reduce AD and may help to bring inflation under control.

Question 37

How may cutting government spending constrain AD, reduce or control inflation

Answer 37

- The government may decide to reduce expenditure on public projects or cut key government budgets if it considers excessive government spending to be unaffordable or perhaps inflationary.

Question 38

How may cutting the budget deficit constrain AD, reduce debt or control inflation.

Answer 38

- Cutting the governments long-term borrowing commitments may help to stabilise economic growth as reduced debt repayments in the future can be reinvested back into the economy.

Question 39

What is a budget deficit?

Answer 39

When a government receives less income through tax receipts and other government revenue than it spends.

Question 40

What is a budget surplus?

Answer 40

What a government receives less incomes more income through tax receipts and other government revenue than it has to pay out in its spending plans.

Question 41

What is a direct tax?

Answer 41

A tax imposed on the income of individuals or profits of businesses. This is a type of tax paid directly to the government.

Question 42

What are the 4 types of direct tax?

Answer 42

1)Income tax 2)Corporation tax 3)Inheritance tax 4)National Insurance contributions

Question 43

What is an indirect tax?

Answer 43

A tax imposed on goods or services. This increases the price of that goods or service.

Question 44

What are the three types of indirect tax?

Answer 44

1)Value Added Tax 2)Excise Duty 3)Customs Duty

Question 45

What are Excise Duties?

Answer 45

Indirect Taxes on the sale or use of specific products, such as alcohol, tobacco and energy.

Question 46

What is Customs Duty?

Answer 46

A tax imposed on imports and exports of goods.

Question 47

Explain what happens to a LRAS Keynesian diagram if the government use an expansionary fiscal policy and decide to cut taxation?

Answer 47

Cutting taxation will boost AD to AD1, as consumption rises. This has the effect of increasing real national output from Y to Y1. There will also be the added benefit of creating employment. however, this has to come at the expense of an increase in the price level to P1. In addition if consumption is spent on imports then it will worsen the current account on the balance of payments.

Question 48

Explain what happens to a LRAS Keynesian diagram if the government use an expansionary fiscal policy and decide to cut corporation tax.

Answer 48

This may boost firms profits, which can then be reinvested into capital projects. LRAS will shift to the right to LRAS1. Productive capacity has now increased to FE1 and there has been a fall in the price level from P to P1, helping to soften inflationary pressure.However if AD remains unchanged, spare capacity has now increased in size from YFE to Y1FE1, indicating a waste of resources.

Question 49

Explain what happens to a LRAS Keynesian diagram if the government use an contractionary fiscal policy and decide to increase taxation.

Answer 49

This will cut AD to AD1, as consumption falls. This has the effect of reducing inflationary pressure as the price level falls from P to P1. There will also be the added benefit of improving the current account on balance of payments as less income is spent on imports. However, this has come at the expense of a reduction in real national output from Y to Y1, which damages economic growth. In addition falling consumption and lower AD is likely to increase cyclical unemployment.

Question 50

What is a supply side policy?

Answer 50

Policies that seek to improve the long run productive potential output of the economy.

Question 51

What are market based supply side policies?

Answer 51

Policies that allow the free market to operate with government reducing its role in the market.

Question 52

What are interventionist supply side policies?

Answer 52

Involve government intervention to tackle market failure.

Question 53

What are the three interventionist SSP’s

Answer 53

- Government spending on Education/Training - Government spending on Infrastructure - subsidies to firms to promote investment

Question 54

What are the three types of Market based SSP’s?

Answer 54

-Tax reform -Labour Market reform -Competition Policy

Question 55

What are the tax reform SSP’s?

Answer 55

-Lower income tax -Lower corporation tax

Question 56

What are the labour market reform SSP’s?

Answer 56

-Reduce benefits -Reduce min wages -Reduce trade union power

Question 57

What are the competition policy SSP’s?

Answer 57

-Privatisation -Deregulation -Trade Liberalisation

Question 58

What are the 6 cons/evaluation of SSP’s

Answer 58

-No guarantee of success -Cost -Time lags -Negative stakeholder impact -Output gap -Need for targeted SSP’s

Question 59

What market based SSP’s are used to increase incentives?

Answer 59

1)Cutting income tax 2)Cutting corporation tax 3)Modification of welfare payments 4)Investment grants 5)Regional policy

Question 60

What are the market based SSP’s used to promote competition?

Answer 60

1)Deregulation 2)Privatisation

Question 61

How does Deregulation promote competition?

Answer 61

Opening markets to fewer competition and removing barriers to entry should help to drive productivity gains and boost supply.

Question 62

How does privatisation promote competition?

Answer 62

Minimisation of state control which can often be inefficient.

Question 63

How may supply side policies occur independently of the government?

Answer 63

-If the business are feeling confident about the future state of the economy, they may choose to expand their production of goods and services or invest in new capital. -Firms may believe that the economy is likely to grow in future, and so invest now in order to meet future demands.

Question 64

If the economy is running up against capacity constraints, the government, how will investment into training and education influence economic growth?

Answer 64

It should boost LRAS to LRAS1. This has a positive effect on inflation as the price level moves down from P to P1. Economic growth has been enhanced to Y1, also creating employment. Productive potential therefore has also increased to FE1.