4.5.4 macroeconomic policies in a global context

Question 1

what is transfer pricing, give examples and can it be controlled

Answer 1

it is pricing transactions between companies under common control, e.g facebook, apple, amazong

it can be controlled via:

• regulation of transfer pricing - HMRC
• global agreements needed - who is going to agree to this? Game theory?
• global companies powerful - can threaten to relocate e.g. Nissan

Question 2

3 possible policies to reduce a fiscal deficit and national debt. choose from fiscal, monetary, exchange rate, supply side and direct control policies

Answer 2

• contractionary fiscal policy reduces a budget deficit in the SR
• SS policies promote growth to enable economies to grow out of a fiscal deficit in the LR, by increasing tax revenues
• exchange rate policy can be used to promote stability, or to promote export led growth through devaluing/competitive devaluations
• direct controls - refers to regulations e.g. to reduce anti-competitive practises (to protect consumer interest), NMW, labour laws to protect workers and increase income

Question 3

explain three possible policies to reduce poverty and inequality

Answer 3

• SS policies to improve health - ability of low income workers to be productive increases
• fiscal policy (progressive income tax, and increases in income related benefits)
• direct controls to increase NMW to increase income of lowest paid workers

Question 4

explain the impact of changing interest rates

Answer 4

increase IT -> cost of borrowing increases -> business invest less -> consumer borrowing falls -> saving increases -> AD falls leading to a fall in growth/negative growth -> price level falls - inflation slows or turns to deflation. time lag of 18-24 months, blunt tool (whole economy contracts), can cause an appreciation causing exports to be less competitve too. impact will depend on economic cycle, and whether inflation was demand-pull or cost-push

Question 5

explain the impact of changing money supply

Answer 5

BoE creates money -> buys bonds -> money is injected into the circular flow of income -> AD increases as investment and consumption increase -> growth, fall in deflationary pressure, credit crunch eases -> bond priuces increase due to more demand -> yield falls -> cheaper for businesses to borrow by selling bonds -> long run interest rates fall -> investment increases

Question 6

three possible policies to improve international competitiveness

Answer 6

• SS policies to improve productivity and reduce unit labour costs
• ER policy to decrease ER = competitive devaluation
• deregulation to reduce business costs and improve price competition

Question 7

3 possible external shocks to the global economy

Answer 7

• covid - response was to prevent mass unemployment by suppporting businesses to keep workers employed (furlough), very loose monetary policy (IRs reduced, QE increased, business loans guaranteed)
• oil price hikes- (russian sanctions, buoyant global demand) - fuel duty cuts, long run strategy to promote renewables, windfall tax on energy companies, price caps on gas and electricity
• global financial crisis - QE, loose monetary policy, loose fiscal policy (VAT cut, car scrappage schemes)

Question 8

why is it difficult to regulate the behaviour of global companies

Answer 8

• because they can move to countries w lower regulation
• govs want to keep global companies happy as they provide employment and tax revenue
• govs in one country cannot tell other countries what their policies should be, and there is often a race to the bottom to incentive global companies

Question 9

how does inaccurate information affect the ability of the government to design effective policies

Answer 9

some issues are new, and the economy has not faced them before, so there is no data available or there is likely to be a time lafg until any is available

Question 10

how does uncertainty and risk affect the ability of the government to design effective policies

Answer 10

some policies are longer term, so projections about the future state of the economy are also subject to risk and uncertainty

Question 11

how does the inability to control external shocks affect the ability of the government to design effective policies

Answer 11

na external shock such as covid can destroy the ability of the gov to design effective long run policies e.g. the uk was projected to be running a budget surplus by 2021 but covid has now meant that national debt is near 100%