2.6 Objectives and policies Flashcards
What are the 4 main macroeconomic objectives?
Economic Growth
Low and stable inflation
Low unemployment
Balance of payment equilibrium on current account
Explain economic growth
It is the increase in capacity of CELL in an economy.
Governments aim for around 2-3%; sustainable, demand pull less likely
What are the benefits of economic growth?
Can have positive impacts on AD determinants and living standards.
Negatives of economic growth
Inflation; increase in AD causes increase in price —> inflation
Current Account deficit; spending ^ means more imports —> causes a deficit
Explain economic objective of unemployment
Target - 4-5%
100% impossible due to frictional unemployment
What are the benefits of low unemployment?
Households have more disposable income - spending increases
Efficient use of resources (human capital)
More tax - govt get more money; less borrowing
What are the negatives of low unemployment?
Too low can cause a high increase in spending - may cause inflation to rise as AD rises
Explain objective balance of payments equilibrium for current account
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
Benefits of current account surplus
Higher employment in export sector
Low import spending - more demand on domestic goods - helps domestic employment
Negatives of current account surplus
Explain the objective of low and stable inflation
Low rate of inflation is symptom of economic growth
Target — 2%
Benefits of a low & stable inflation rate
Allows firms to confidently plan future investment
What are demand-side policies?
Demand side policies aim to shift AD
2 types are fiscal and monetary
What is monetary policy involve?
Adjusting interest rates to influence AD
Bank of England is responsible for setting monetary policy
What are the 2 main tools of monetary policy?
Adjustments to interest rates
Quantitative easing
How does adjustments to interest rate affect AD
Decrease in interest rate - borrowing is cheaper; increases - consumption increases - AD increasss - inflation increases
Increase in interest rate -
What are problems with monetary policy?
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
What is Quantitative easing?
When BoE buys assets in exchange for money to increase money supply in times of very low demand
How does quantitative easing work?
Quantitative easing creates new bank reserves providing banks with more liquidity and encourage lending. Stimulates borrowing and increases spending and AD.
What does fiscal policy involve?
Fiscal policy involves change of govt spending and taxes to control AD.
What is expansionary and contractionary fiscal policies?
Expansionary fiscal policy means government increase spending and decrease tax to encourage consumer spending.
How does fiscal policy use taxation to control AD?
An increase in tax will shift AD to the left as less spending occurs.
What is the difference between direct and indirect tax?
Direct tax is placed on income and profits whereas indirect tax is placed on products when consumes spend and purchase products.
What are evaluation points of demand-side policies?
-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.
