4 - Market Orientated Policies

Question 1

The 3 macroeconomic objectives

Answer 1

• Long-term economic growth
• Low inflation
• Low unemployment

Question 2

What drives long-term economic growth

Answer 2

• Technological progress
• Research and development
• Education and training

Question 3

What drives low unemployment

Answer 3

• Tax cut
• Capping (reducing) unemployment benefits
• Reducing the power of labour

Question 4

What causes inflation

Answer 4

• Cost-push inflation: more competition - Costs of wages and raw materials is high so price rises
• Demand-pull inflation: Demand is high so price rises to capitalise

Question 5

3 approaches

Answer 5

• The classical approach (Market-orientated supply-side policies)
• The Keynesian approach (Aggregate Demand , Y=C+I+G)
• The ‘Third way approach’

Question 6

The classical approach (market-orientated supply-side policies)

Answer 6

• The classical approach advocates for laissez-faire economic system
• Markets left to operate freely without much government interference
• Classical economist emphasise supply-side policies to enhance productivity, innovation and efficiency
• Emphasise importance of competitive markets to ensure businesses strive for innovation
• Focused on long-term growth

Question 7

The Keynesian approach (Aggregate Demand , Y=C+I+G+(X-M)

Answer 7

• Consumption + Investment + Government spending + (Exports - imports)
• Consumption = Amount people spend affect Demand
• Investment = Amount businesses invest in capital (machinery, equipment), important in determining amount of economic activity
• Government spending = Expenditures on goods, services, public infrastructure by the government. Government spending can stimulate demand and lift the economy
• Cause a multiplier effect, where an initial increase in spending (consumption, investment or government spending) will have an impact on overall output and income
• Keynesian addresses short run economic issues like cyclical unemployment

Question 8

The ‘Third way’ approach

Answer 8

• Supports Free-market principles however recognises the importance of government intervention to correct market failures and address social issues
• Strong emphasis on social justice and social inclusivity. Aim to address income inequality and reduce poverty through market oriented policies
• Emphasises investment in human capital through policies that improve education and training opportunities

Question 9

When were market-orientated supply-side policies first adopted

Answer 9

In the 1980’s by the Thatcher government in the UK and the Reagan administration in the USA

Question 10

What were/are the market-orientated policies

Answer 10

• Reducing government expenditure
• Reducing taxes to increase incentives to work
• Reducing the monopoly power of trade unions (reducing power of labour)
• Encouraging competition
• Abolishing exchange controls and other impediments to the free movement of capital (international trade)

Question 11

Effect of tax cut on Unemployment (know the graph in book)

Answer 11

• Unemployment reduces

Question 12

Affects of a cut in benefits on number people unemployed (know the graph in book)

Answer 12

• ## Unemployment rate decreases, meaning aggregate supply of labour increases

Question 13

Unemployment decreases what happens to GDP

Answer 13

GDP increases as there’s more output

Question 14

What happens to wages if wage rate is flexible after a unemployment benefit cut

Answer 14

Wages decreases, as more people can be employed as more people will have more incentive to work