4.4 Macroeconomic Policy and impact on firms and individuals

Question 1

What is the largest component of AD?

Answer 1

Consumer Spending

Question 2

Define Aggregate Supply

Answer 2

The total quantity of output in the economy at a given price level

Question 3

Give 4 things that increase Long-Run Aggregate Supply

Answer 3

• Productivity
• Size of the labour force
• Innovation and Enterprise
• Capital Investment

Question 4

Give the 3 things that cause a shift in short term aggregate supply

Answer 4

• Employment Costs
• Cost of other inputs
• Impact of the government (e.g. taxes)

Question 5

How do Employment Costs cause a shift in short-run Aggregate Supply?

Answer 5

Labour costs are affected by the level of productivity

Question 6

How does the cost of other inputs cause a shift in short-run Aggregate Supply?

Answer 6

Things like the exchange rate can affect the price of key imported products

Question 7

How do the government cause a shift in short-run Aggregate Supply?

Answer 7

Environmental taxes like carbon duties raise costs for businesses

Question 8

Define ‘Full Capacity Output’

Answer 8

The maximum level to which aggregate supply can grow

Question 9

What happens when the economy’s at very high capacity and there’s an increase in AD?

Answer 9

There will be little economic growth and high inflation

Question 10

Define inflation

Answer 10

A sustained increase in the price level

Question 11

Draw the diagram for cost-push inflation

Answer 11

Question 12

Draw the diagram for demand-pull inflation

Answer 12

Question 13

Define ‘Multiplier Effect’

Answer 13

A ripple effect whereby one thing leads to another

Question 14

Define Fiscal Policy

Answer 14

The use of government spending and taxation to control AD

Question 15

What does expansionary fiscal policy entail?

Answer 15

Increasing AD

• Cutting taxes to increase public spending
• Increased government spending

Question 16

How can expansionary fiscal policy also have a benefit to AS?

Answer 16

Spending in the public sector trickles down to the private sector

Question 17

What does contractionary fiscal policy entail?

Answer 17

Decreasing AD

• Raising taxes
• Spending less

Question 18

Draw the graph for Expansionary Fiscal Policy

Answer 18

Question 19

Draw the graph for Contractionary Fiscal Policy

Answer 19

Question 20

Define direct tax

Answer 20

A tax that comes straight out of your wage

Question 21

Define indirect tax

Answer 21

A tax that you pay after receiving a wage

Question 22

Give 3 general advantages of fiscal policy

Answer 22

• Small lag time
• Can direct spending to specific purposes

- Can also have a long term impact (e.g. investment into education)

Question 23

Give 7 general disadvantages of fiscal policy

Answer 23

• Governments might have imperfect information about the economy. It could lead to inefficient spending.
• There is a significant time lag
• If the government borrows from the private sector, there are fewer funds available for the private sector, which could lead to crowding out.
• The bigger the size of the multiplier, the bigger the effect on AD and the more effective the policy.
• If interest rates are high, fiscal policy might not be effective for increasing demand.
• If the government spends too much, there could be difficulties paying back the debt, which could make it difficult to borrow in the future.

- Can have unintended consequences

Question 24

Define Monetary Policy

Answer 24

The manipulation of interest rates, the money supply and the exchange rate to influence the Aggregate Demand

Question 25

What does SPICED stand for?

Answer 25

``` Strong Pound Imports Cheaper Exports Dearer ```

Question 26

How do interest rates effect borrowing and saving

Answer 26

Interest Rate up - More saving - Less borrowing

Question 27

What is done to the interest rate for an expansionary monetary policy?

Answer 27

Decreased

Question 28

What is done to the interest rate for a contractionary monetary policy?

Answer 28

Increased

Question 29

How does increasing the interest rate effect the exchange rate?

Answer 29

Appreciation

Question 30

How are economic growth and unemployment related?

Answer 30

Inversely proportional

Question 31

Give 2 general advantages of Monetary Policy

Answer 31

- Doesn't create a government deficit | - Can control demand pull inflation

Question 32

Give 3 general disadvantages of Monetary Policy

Answer 32

- Lag time of upto 2 years - Banks don't have to follow it, it's only a guideline - Does not control cost push inflation

Question 33

Define quantitative easing

Answer 33

An unconventional method of Monetary Policy, amining to stimulate bank lending by printing money and giving it to them in exchange for bonds

Question 34

Why was quantitative easing done during the recession?

Answer 34

Interest Rates could not be lowered any more

Question 35

How is Quantitative Easing extra inflationary?

Answer 35

Both inflation from creating money (Supply and Demand diagram) and from the increase in AD

Question 36

Give the 5 steps of Quantitative Easing

Answer 36

``` Create Money Buy bonds with it Reduces interest rates People spend more Creates jobs and boosts GDP ```

Question 37

Give a general advantage of Demand Side policies

Answer 37

Stimulates the economy if AD > AS

Question 38

Give a general disadvantage of Demand side policy

Answer 38

Won't work if the unemployment is structural

Question 39

Give 5 Supply Side policies

Answer 39

- Increase incentives to produce - Promote Competition to increase productivity - Reform the labour market - Improve the skills and quality of the labour force - Improve Infrastructure

Question 40

Define Supply Side policy

Answer 40

A policy that increases the total capacity of the economy to produce, thus affecting Aggregate Supply

Question 41

What is the main aim of Supply Side policies?

Answer 41

To increase the productive capacity of the economy

Question 42

Define 'Market Based Policy'

Answer 42

Policies with very little government intervention, using the free market to increase AS

Question 43

Define 'Interventionist Policy'

Answer 43

Policies using government intervention to correct any failures in the free market

Question 44

Give an example of a market based supply side policy by increasing incentives

Answer 44

Lowering tax rates to increase supply

Question 45

Give an example of an interventionist supply side policy by increasing incentives

Answer 45

Tax credits to make people better off in work

Question 46

Give an example of a market based supply side policy by promoting competition

Answer 46

Deregulating by reducing trade barriers

Question 47

Give an example of an interventionist supply side policy by promoting competition

Answer 47

Implementing competition policy e.g. include regulations to curb monopolies, preventing mergers that could stifle competition, and measures to encourage entry and exit of firms in the market

Question 48

Give an example of a market based supply side policy by reforming the labour market

Answer 48

Reducing employment protection / influence of trade unions

Question 49

Give an example of an interventionist supply side policy by reforming the labour market

Answer 49

Removing the minimum wage

Question 50

Give an example of a market based supply side policy by improving the skills and quality of the labour force

Answer 50

Training within a business

Question 51

Give an example of an interventionist supply side policy by improving the skills and quality of the labour force

Answer 51

Training in schools

Question 52

Give an example of a market based supply side policy by improving infrastructure (not too important)

Answer 52

Using private sector funds to fund pubic goods

Question 53

Give an example of an interventionist supply side policy by improving infrastructure (not too important)

Answer 53

Increasing public expenditure to pay for public goods

Question 54

Draw the diagram for a Supply side Policy

Answer 54

Question 55

Give 3 general advantages of Supply Side policies in general

Answer 55

- Impacts all of the macroeconomic objectives - Sustainable - Antinflationary

Question 56

Give 3 general disadvantages of Supply Side policies in general

Answer 56

- Very expensive - Long lag time - No guarantee they will work

Question 57

Name the 4 macroeconomic objectives

Answer 57

- Stable inflation (2%) - Low unemployment - Economic Growth - Balance of Payment

Question 58

What does the Keynesian model say about expansionary policies?

Answer 58

They tended to be used for too long and so people were left unemplyed

Question 59

What did Keynes advocate to control the macroeconomic objectives?

Answer 59

An expansionary fiscal policy with high government spending

Question 60

What is the main issue with Keynes expansionary fiscal policy?

Answer 60

Inflation can get very high

Question 61

What does the Monetarist theory say is best to achieve the macroeconomic objectives?

Answer 61

Leaving the economy to evolve through market forces and not government intervention

Question 62

What does the Monetarist policy say about increasing interest rates?

Answer 62

It will only damped morale and cause instant inflation