4.5.4 Macroeconomic policies in a global context

Question 1

What are the 4 types of policies the Government use

Answer 1

Fiscal Policies

Monetary Policies

Supply-side policy

Exchange rate policies

Question 2

What are direct controls

Answer 2

any measure of government intervention which is directly aimed at increasing or decreasing some particular group of payments or receipts in the balance of payment

Direct controls include minimum or maximum prices/wages, quotas on imports, limits on currency or regulation e.g. maximum interest rates

Question 3

What are the 4 way the Government can reduce fiscal and national debts

Answer 3

Austerity

Demand stimulus (Expansionary fiscal + monetary policy)

Automatic stabilisers

Default on loans

Question 4

How have the UK Government since 2010 tried to decrease the national debt

Why is it an unfavourable thing to do

What could free-market economists suggest to do instead

Answer 4

Austerity - attempt to decrease Government spending and increase taxes

could limit growth, and reduce living standards and income equality

cutting out waste - i.e become more efficient - however, would these savings be enough to make a difference

Question 5

How could demand stimulus reduce fiscal + national debts

Answer 5

by high spending - causing economic growth

bringing high tax revenues

more positive fiscal debt and may work in the long run to reduce national debts

Question 6

How could you rely on automatic stabilisers to reduce fiscal + nation debts

Answer 6

allow the economy to grow so national debt/fiscal deficit will reduce as a percentage of GDP

Approach the US took after the 2008 financial crash - their economy recovered fairly quickly

Question 7

Defaulting on loans to reduce fiscal + national debt

Answer 7

failure to meet the legal obligations to pay the loan - no more payments

economic cost of this is so large that governments only default if it is the only option. Russia and Argentina have defaulted on their debts in the past

Question 8

What are the ways the Government can reduce poverty and inequality

Answer 8

Redistribution of income using a progressive tax system - taxation in fiscal policy

Gov welfare spending - fiscal

Improving incentives to work - supply side policies

Question 9

How can a progressive tax system reduce poverty and inequalities

What is the problem with this idea

Answer 9

Redistribution of income from rich to poor (inheritance is most progressive)

However Laffer curve can show unintended consequences

Not always effective as America has a progressive tax system but has high income inequalities

Question 10

How can Government welfare spending reduce poverty and inequalities

What is the problem with this

Answer 10

Means tested benefits - targeted at people who need the most help and provide a safety net/minimum standard of living and can improve inequalities

However, can reduce in incentives to work

Question 11

How can the Government providing goods/services help reduce poverty and ineqalities

Answer 11

Give citizens equal opportunities and access to services they otherwise may not be able to afford

Can give children an equal start in life like education and health care

Not the same in every country

Question 12

How can the Government reduce wage differentials to help reduce poverty and inequalities

Answer 12

Minimum wage can help improve income of the poor

Maximum wage prevent unproportionate executive pay

Antidiscrimination laws

Trade Union friendly legislation

Question 13

How can the Government improve access to education and training opportunities help reduce poverty and inequalities

Answer 13

Will prevent children from poorer backgrounds achieving less - causing a reduction in earning potential

Like pupil premium schemes, easier access to unis

Help prevent structural unemployment

Question 14

How can price control on essentials (max price) by the Government to reduce poverty and inequalities

What is the problem with this

Answer 14

housing, bus fares, food items

Increase spending power of the poor and in turn real incomes

However: can cause excess supply and possible back markets

Question 15

How may free market economist argue against Government intervention for Poverty and Inequalities

Answer 15

Trickle down concept

Increasing the income of the rich will lead to an increase in income of the poor

E.g. rich can increase amount of jobs

Higher inequality can be an incentive to work

Question 16

Which are the ways the Government can intervene to change interest rates and supply of money

Answer 16

Monetary policy

quantitative easing

Question 17

How can the Central bank control interest rates and money supply

Answer 17

May do this for domestic reason to control inflation, exchange rate issues or changes in world commodity prices

They can change the base rate, which will affect the liquidity of commercial banks

Question 18

Why is it argued that the central bank don’t have complete control of the money supply

Answer 18

they cannot control the ability of the financial system to create credit

Globalisation of financial market makes it more difficult to control money supply

Central banks should manage demand side inflation but not supply side

Question 19

How may the banks use QE to control money supply, and demand in the economy

Answer 19

QE is used when there is a liquidity trap (base rate is too low already)

It decrease interest rates on assets, causing these assets to be sold and liquidity to increase in financial sector

Increasing demand in the economy

Question 20

What polices may the Government might use to increase international competitiveness

Answer 20

Supply side policies

Exchange rate policies - monetary policies

Join WTO or trade agreement

Question 21

How may supply side policies allow an increase in international competitiveness

Answer 21

Improve productivity

Improve flexibility for businesses through deregulation and reduced taxation

Tax incentives

Education to improve skills of labour force

Question 22

How can the central banks use exchange rates to improve international competitveness

How can the BoE do this

Answer 22

Weakening the currency

E.g. through decreasing the interest rates will reduce hot flows and hence demand for the currency

Therefore exports will become more competitive

Question 23

How can the Government use policies combat external shocks

Answer 23

Globalisation makes world economies interdependent

E.g. shock in commodities like oil - like a price rise

Expansionary monetary/fiscal can be use to reduce impact on price levels

Recessions like financial crashes may use demand stimulus

Question 24

What are the benefits of transnational companies

Answer 24

creation of jobs, tax revenue, knowledge and investment

Question 25

What are the drawbacks to transnational companies

Answer 25

Destroying local culture, affecting the environment, withdrawing more profit than investment, influencing politicians

Question 26

How do developing nations prevent TNS from exploiting their country for profits

Answer 26

Setting up a joint company with a local partner - some profits are retained within the country and knowledge/technology is tranferred

Question 27

What is transfer pricing

Answer 27

A ways firms engage in tax avoidance

Occur if a good is produced in one country and transferred to another country to make it into something else and the is sold

To avoid tax, a firm can set a lower price on the product made in the first country and then artificially increase the price in the second country

Question 28

Why is it so difficult for individual governments to control TNC

Answer 28

Solutions require worldwide agreements - but one solution cannot benefit one country more than it does another

Also division within countries around policies with TNC

Question 29

Why is inaccurate information cause problems for policy makers

Answer 29

Short-term information like GDP figures for the previous month are often inaccurate so the Government is unable to see problems clearly

Knowledge about how much tax evasion/avoidance in an economy and how to prevent it

BoE makes decision on past information which may not reflect the current climate

Cost-benefit analysis can be time consuming/cost and impractical

Question 30

How can risks and uncertainties cause problems for policy makers

Answer 30

Government can not accurately predict the future - which policy is most beneficial

Full impact + unintended consequences from their policies

Question 31

How can external shocks be a problem for policy makers

Answer 31

Government is unable to control + prepare for these - best outcome is to lessen their impact

All situations are different

Unintended consquences