2.6 Objectives and policies

Question 1

What are the 4 main macroeconomic objectives?

Answer 1

Economic Growth
Low and stable inflation
Low unemployment
Balance of payment equilibrium on current account

Question 2

Explain economic growth

Answer 2

It is the increase in capacity of CELL in an economy.
Governments aim for around 2-3%; sustainable, demand pull less likely

Question 3

What are the benefits of economic growth?

Answer 3

Can have positive impacts on AD determinants and living standards.

Question 4

Negatives of economic growth

Answer 4

Inflation; increase in AD causes increase in price —> inflation
Current Account deficit; spending ^ means more imports —> causes a deficit

Question 5

Explain economic objective of unemployment

Answer 5

Target - 4-5%
100% impossible due to frictional unemployment

Question 6

What are the benefits of low unemployment?

Answer 6

Households have more disposable income - spending increases
Efficient use of resources (human capital)
More tax - govt get more money; less borrowing

Question 7

What are the negatives of low unemployment?

Answer 7

Too low can cause a high increase in spending - may cause inflation to rise as AD rises

Question 8

Explain objective balance of payments equilibrium for current account

Answer 8

Balance of payments for current account is record of financial transactions of exports/import of goods/services
Exports > imports; current account surplus
Imports > exports; current account deficit
Current account is cyclical; in a boom, more spending, more imports, current account deficit

Question 9

Benefits of current account surplus

Answer 9

Higher employment in export sector
Low import spending - more demand on domestic goods - helps domestic employment

Question 10

Negatives of current account surplus

Question 11

Explain the objective of low and stable inflation

Answer 11

Low rate of inflation is symptom of economic growth
Target — 2%

Question 12

Benefits of a low & stable inflation rate

Answer 12

Allows firms to confidently plan future investment

Question 13

What are demand-side policies?

Answer 13

Demand side policies aim to shift AD
2 types are fiscal and monetary

Question 14

What is monetary policy involve?

Answer 14

Adjusting interest rates to influence AD
Bank of England is responsible for setting monetary policy

Question 15

What are the 2 main tools of monetary policy?

Answer 15

Adjustments to interest rates
Quantitative easing

Question 16

How does adjustments to interest rate affect AD

Answer 16

Decrease in interest rate - borrowing is cheaper; increases - consumption increases - AD increasss - inflation increases
Increase in interest rate -

Question 17

What are problems with monetary policy?

Answer 17

Exchange rate may be affected so much that exports fall significantly - cause balance of trade deficit
Range of different interest rates - not all affected by BoE
Lack of confidence causes no incentive to borrow or lend regardless of interest rate

Question 18

What is Quantitative easing?

Answer 18

When BoE buys assets in exchange for money to increase money supply in times of very low demand

Question 19

How does quantitative easing work?

Answer 19

Quantitative easing creates new bank reserves providing banks with more liquidity and encourage lending. Stimulates borrowing and increases spending and AD.

Question 20

What does fiscal policy involve?

Answer 20

Fiscal policy involves change of govt spending and taxes to control AD.

Question 21

What is expansionary and contractionary fiscal policies?

Answer 21

Expansionary fiscal policy means government increase spending and decrease tax to encourage consumer spending.

Question 22

How does fiscal policy use taxation to control AD?

Answer 22

An increase in tax will shift AD to the left as less spending occurs.

Question 23

What is the difference between direct and indirect tax?

Answer 23

Direct tax is placed on income and profits whereas indirect tax is placed on products when consumes spend and purchase products.

Question 24

What are evaluation points of demand-side policies?

Answer 24

-Classical economists argue increase in AD from policies have no effect on long-run output other than increase prices. Therefore, supply-side policies would work better.

-Keynesian economists argue the effect of change in AD depend on where the economy is operating in terms of employment. Full employment –> only a rise in price, no rise in output.