2.6.1 Macro objectives and 2.6.2 Policy instruments Flashcards
macro policy
Macroeconomic policy aims to control the level of activity in the economy so that the standard of living improves and stability is maintained
econ growth as an MP
Economic growth
- Too fast = demand pull inflation, due to excess demand , unsustainable growth
- Sustainable growth → GDP is growing in real terms continuously, leading to higher living standards
low unemployment as an MP
- Maximse incomes and output
- Needed for social and political reasons
- Decreasing unemployment decreases poverty and decreases the amount of resources wasted
low and stable rate of inflation as an MP
Makes planning and investment more predictable → target rate is 2%
balance of payments equilibrium as an MP
- Positive → money made from exports is more thna money spent on imports, avoids a trade deficit
- Current account → sum of the balance of trade, net income from abroad and net current transfers
contractionary policies
Contractionary policies → when the economy is growing too quickly and inflationary pressure is building up during a boom, reduces the level of economic activity and national income, and the demand for imports
- Increased leakages and decreased injections, investment depressed, unemployment rises and AD falls
- High interest rates
- Tax increases
- Cuts in gov spending
expansionary policies
Expansionary policies → when there is a recession, low rates of growth and high unemployment, used to stimulate the level of economic activity and national income, stimulate growth and reduce unemployment
- Reduces leakages and increases injections, encourages businesses to invest to expect growing demand
- Lower interest rates
- Tax cuts
- Increased gov spending
difference between fiscal and monetary policies
- Fiscal policy → taxes, gov spending and borrowing
- Expansionary monetary policy → lower in interest rates
fiscal policy
- Involves changes in the levels of taxation or gov spending in order to influence the level of activity in the economy
- Gov gains income from taxation and spends it on providing services
- Levels of tax or gov spending can be altered to reduce/increase the amount of economic activity
- Gov can go into public sector deficit to stimulate economic growth → gov spending exceeds government income
fiscal EXPANSIONARY policy graph
- Unemployment is high (Yf - Ye)
- Spare capacity
- When AD is increased and shifted to the right
- This creates economic growth and causes unemployment to fall
- Macro economic objectives
- HOWEVER: increased inflation, depends on how much, which depends on how much AD is increased
fiscal expansionary policy explanation
- Government cuts tax, which tax and who will benefit?
- People on lower incomes are more likely to spend in the UK and save less
- Cutting business tax, more likely to invest or give as dividends to shareholders → likely to be those on high incomes, who are more likely to save or spend more on imported goods - Disposable income increases
- Increase government spending → employment increases → incomes rise
- Depends on what they spend it on
- LR: education, infrastructure have a bigger long term impact and benefit - Households demand more goods and services, so consumption/consumer spending increases
- Firms need to make more goods and services; firms increase output to meet this extra demand, they employ more workers
- Unemployment falls
- AD increases, Economy grows
- HOWEVER: if AD increases and economy grows too fast, demand pull inflation may occur
contractionary fiscal policy explanation
- Tax increased or gov spending decreased
- Disposable income falls
- Gov spending falls so employment will fall and so will incomes
- Fall in consumption
- Fewer goods and services consumed so businesses have decreasing output
- Businesses are likely to reduce the workforce so unemployment rises
- AD decreases so less activity in the economy
monetary policy
- Uses interest rates to vary costs of borrowing → changes in BANK OF ENGLAND base rate
- Influences the interest rates set by commercial banks, building societies and other institutions for their own savers and borrowers
expansionary monetary policy explanation
- Cut in base rate of BOE, so other interest rates in the economy do the same
- Less incentive to save, so it decreases
- Greater incentive to spend, so consumer spending increases
- Cost of borrowing falls so households with mortgage/loans, disposable income increases so consumer spending increases, and borrowing/buying on credit is cheaper so spending increases
- Borrowing costs falls for firms so Investment increases
- As households spend more and firms invest more, firms need to increase output
- Employ more workers, so unemployment falls and AD increases and the economy grows
- AD increased and economy grows
contractionary monetary policy
- Base rate is increased
- Other interest rates in the economy increase
- Cost of borrowing increased and incentive to save increases
- Fall in consumption and investment
- Fewer goods and services consumed so businesses decrease output
- Businesses are likely to reduce the workforce and so unemployment rises
- AD has decreased and the economy has slowed down
supply side policies
Supply side policies include all the measures desinged to increase productive capacity of the economy by influencing aggregate supply
- Use existing resources more efficiently, increasing productivity
- Include improvements to education and training, incentives to encourage investment, developing a flexible labour force, reducing structural employment, making markets more competitive and encouraging infrastructure development
- Can reduce inflationary pressures → AS grows, so AD can expand without being too close to maximum capacity
graph for supply side policies
- Increase AS, shift to the right
- Economic growth Ye → Ye1 → Ye2 without inflation Pe → Pe1
- If use demand side and supply side policies, the economic growth Ye → Ye1 → Ye2 without high inflation
labour focused SS policies
- education and training → economic growth
- Lowers unemployment as more skilled workers
- Redistribution of income → higher skilled workers can have higher paid jobs, and more disposable income
- Increase retirement age, so there are more workers available and pensions are accessed later
- Free childcare, so parents can take less time off and work more
- Increase incentive for work
- Increase minimum wage
- Cut benefits, makes unemployment less attractive, but assumes that people on benefits are choosing not to work
- Cut taxes on working
- Immigration, targeted skills based
capital focused SS policies
- Encourage investment
- Super-deduction, tax relief on investment
- Research and development
- Policies to increase investment, might overlap with fiscal/monetary policies
- Tax breaks for firms → grants and subsidies
- Funding universities
land focused SS policies
- Land use/high rise → redevelopment/land reclamation
- Build into the sea/make use of geographical landscape
enterprise focused SS policies
- reduce regulation, eg EU regulations makes it hard for businesses to compete
- Also try to encourage entrepreneurship
- Privatisation
exchange rate policy, floating rates
Currency determined by market forces, demand for supply of the currency are created by trade and capital flows
quantitive easing
- Bank of England buys back government bonds to increase money in the economy
- This money can be spent/invested so AD increases
- Done in a measured way to avoid extreme inflation → eg Weimar Germany
- Done when there is no other course of action for the government
- BofE buys back bonds
- Banks get cash, economy, I etc increase so AD increases
- Demand of bonds increases
- Price of bonds increases
- So long term Rate of interest Decreases
