4.5.4 Macroecon Policies In A Global Context

Question 1

What is macroeconomics in a global context?

Answer 1

• use of fiscal policy, monetary policy, exchange rate policy, supply side policies and direct control in different countries
• specific reference to: reduces fiscal deficits + national debts, reduce poverty + inequality, changes in interest rates + supply of money to increase international competitiveness

Question 2

What are all macroeconomic policies?

Answer 2

• fiscal policy
• supply side policy
• monetary policy
• exchange rate policy
• direct control/regulations

Question 3

Measures to reduce fiscal deficits + national debt

Answer 3

• fiscal policy = lower govt spending and/or increase taxation
• e.g. austerity policy after stimulus packages following financial crisis
  OR
• expansionary monetary policy = reduces interest rates = encourages borrowing by households + firms, leading to an increase in consumption + investment (increase in AD) + unemployment falls
  OR
• supply side = reduce corporation tax

Question 4

Measures to reduce to fiscal deficit + national debt EVALUATION

Answer 4

• reducing a fiscal deficit = fall in AD + GDP due to less economic activity
• therefore low tax revenue = less govt spending on benefits when unemployment increase in the future

Question 5

What to consider when reducing poverty + inequality?

Answer 5

• income inequality - jobs, wages etc
• wealth inequality - ownership of assets

Question 6

How can ownership of assets help income inequality?

Answer 6

• ownership of assets can lead to higher incomes
• ownership of business = profits
• ownership of land/house = rent
• savings = interest
• shares = dividends

Question 7

Measures to reduce poverty + inequality?

Answer 7

• fiscal policy = progressive taxations rather than regressive, reduce indirect tax, have more levels (tax rates) within income tax
• supply side policies = increase govt spending on benefits + publics services - education/skills/apprenticeships/health/housing etc
• reduce unemployment + retraining to reduce long term unemployment
• spending on local authority housing to reduce homelessness
• benefits - job seekers allowance, housing benefit, disability benefit
• increase govt spending on child care for single parent families

Question 8

Measures to reduce poverty + inequality in developing countries?

Answer 8

• minimum wage legislation = boost income of lower income groups - but could lead to unemployment
• micro-finance, fair trade schemes
• encouraging the growth of small businesses - make start up capital easier to acquire
• lowering interest rates (monetary policy) = cheaper to borrow, less return for savings

Question 9

Measures to reduce income + wealth inequality

Answer 9

Income
- policies to restrict wages at the top end e.g. reducing bonuses for bankers
- maximum wage (diagram)

Wealth
- inheritance tax
- capital gains tax (gains on assets)

Question 10

Changes in interest rates + the supply of money (monetary policy)

Answer 10

• expansionary policy
• lowering interest rates
• encourages borrowing + this stimulates consumption + investment = increase AD
• lowering interest rates = increases money supply

Question 11

Measures to increase international competitiveness (supply side)

Answer 11

• market based = deregulation, encouraging new firms to enter markets = increased competition
• gives firms an incentive to be more innovative, more efficient (allocative + productive)
• encourages more investment, R&D = more competitive with innovation, product differentiation + quality
  ~
• interventionist = govt spend more on education, health + infrastructure = shift in LRAS
• increase in productivity = lower unit labour costs, more efficient
• HOWEVER = opportunity cost to govt = less spending elsewhere = increase tax in the future

Question 12

Measures to increase international competitiveness (exchange rate)

Answer 12

• exchange rate depreciation
• exports cheaper
• imports more expensive

Question 13

Examples of external shocks

Answer 13

• Gaza
• Ukraine crisis
• Covid
• financial crisis
• Brexit

Question 14

Use + impact of policies to respond to external shocks to the global economy

Answer 14

• expansionary fiscal policy immediately after the external shocks
• then a period of austerity as the govt had acquired further debt

Question 15

Time scales of policies

Answer 15

• fiscal policy = immediate
• supply side = more long term

Question 16

What is transfer pricing?

Answer 16

• process by which transnational companies seem to minimise global tax liability by manipulating the internal prices for transactions between the branches in different countries
• prices are manipulated so declared profits are higher in the country with the lowest tax rate

Question 17

Measures to control global companies (TNCs) operations

Answer 17

• tax harmonisation
• e.g. within the EU all members have the same tax rates
• unlikely to happen but could be a starting point for taxes on petrol to tackle climate change to avoid any one economy to be at a disadvantage in terms of competitiveness

Question 18

Problems facing policymakers

Answer 18

• inaccurate information = lag between gathering data, calculating the values + publishing the data
• risks + uncertainties = side effects seen with demand side policies, external shocks
• inability to control external shocks = affects the effectiveness of different policies e.g. monetary policy
• policy makes need to assess the outlook for the future before making decisions on policy as there are often delays on impact e.g. 18 months = policies are limited/clouded by risks + uncertainties

Question 19

Evaluation for transfer pricing?

Answer 19

• hard to enforce = difficult to determine the ‘arms length’ price as there may be no equivalent market transaction
• the stronger the legislation + penalties in a country, the greater the reduction in TNC investment
• large TNCs have excellent lawyers = difficult to take them to court