introduction to macroeconomic policy

Question 1

What are the 4 main macroeconomic objectives?

Answer 1

• Economic growth
• Low unemployment
• Low inflation
• Balance of payments equilibrium

Question 2

What rate of unemployment does the government aim for?

Answer 2

3%.

Question 3

What is a budget deficit?

Answer 3

This occurs when expenditures exceed tax revenues.

Question 4

Describe the difference between government deficit and the budget deficit.

Answer 4

Government debt is an accumulation of budget deficits.

Question 5

What is discretionary fiscal policy?

Answer 5

This is when the government increases their spending and manipulate taxes in order to influence the aggregate demand.

Question 6

What do governments spend the most money on?

Answer 6

Pensions and welfare payments.

Question 7

What is the biggest source of tax revenue?

Answer 7

Income tax.

Question 8

What type of fiscal policies does the government implement when inflation is high?

Answer 8

Deflationary fiscal policies.

Question 9

Give 2 features of expansionary fiscal policy.

Answer 9

Increase in expenditures and reduction in taxes.

Question 10

Describe crowding out.

Answer 10

Occurs when an increase in government spending reduces the resources available for the private sector to use.

Question 11

Will fiscal policies have an immediate impact on the economy?

Answer 11

No, there is a time lag.

Question 12

What 3 things does monetary policy involve?

Answer 12

• Interest rates
• Money supply
• Exchange rates

Question 13

What is the base rate?

Answer 13

The interest rate set by a central bank to loan money to commercial banks.

Question 14

Do low interest rates encourage saving or borrowing?

Answer 14

Low interest rates encourage borrowing.

Question 15

What is the positive wealth effect?

Answer 15

This occurs when people spend more because they feel richer.

Question 16

Briefly describe how quantitative easing works.

Answer 16

The central bank digitally creates new money, which it then uses to buy corporate and bank bonds, so that banks are more willing to loan money to consumers to stimulate more demand in the economy.

Question 17

Why might changing the base rate have no effect on the economy?

Answer 17

Banks may not choose to pass this base rate onto consumers in the form of higher interest rates.

Question 18

What is the aim of supply side policies?

Answer 18

To improve the long-run productive potential of the economy.

Question 19

How are training and education beneficial to firms?

Answer 19

They improve the productivity of the workforce.

Question 20

Give 1 benefit of privatisation.

Answer 20

Firms now have a profit-motive, and so will find ways to cut costs and improve productivity, which in turn increases output.

Question 21

Are supply-side policies better at reducing structural or cyclical unemployment?

Answer 21

Structural employment.

Question 22

How will an increase in interest rates affect exchange rates?

Answer 22

It attracts more hot money, thus appreciating the currency against one with a lower interest rate.

Question 23

What is likely to happen to aggregate demand given an exchange rate appreciation?

Answer 23

Exports become expensive, so AD is more likely to fall.

Question 24

Explain why inflation rises as unemployment falls.

Answer 24

As the economy grows, workers have more bargaining power as firms need more of them, so workers demand higher wages which increases the prices of goods and thus the overall inflation rate.

Question 25

What is a positive output gap?

Answer 25

Occurs when the actual level of output exceeds the potential level of output.

Question 26

Why does economic growth lead to a current account deficit?

Answer 26

British consumers have a high propensity to import, which eventually exceeds the level of exports during times of economic prosperity.

Question 27

What is a command economy?

Answer 27

This is when the government allocates all the scarce resources in an economy.

Question 28

What is a mixed economy?

Answer 28

Combines the features of both a command economy and free market economy.