Lesson 52-Macroeconomic policies in a global context

Question 1

What is the term fiscal austerity used to define?

Answer 1

This is a term used to describe policies designed to reduce the size of fiscal deficit and eventually lower or control the size of national debt

Question 2

Give three policies which could be used to reduce a fiscal deficit

Answer 2

.Cuts in government spending
.Higher taxes
.Supply side policies to encourage growth

Question 3

Give two arguments in favour of fiscal austerity

Answer 3

.Reduce the budget deficit and national debt is in the long run interests of the economy
.Shrinking state encourages private sector growth in the long run
.There is a high opportunity cost from over £50 billion spent each year on debt interest
.Cutting the fiscal deficit can improve investor confidence and may attract more foreign investment to the UK

Question 4

Give two arguments against fiscal austerity

Answer 4

.Austerity is self defeating especially if it leads to price deflation and lower employment
.Government bond yields are low
.Wrong to cut state spending when the economy is a liquidity trap
.Economic growth is needed to pay back the debt and fiscal austerity makes this harder to achieve
.There are damaging social consequences from fiscal austerity

Question 5

Give two examples of policies which are designed to reduce the inequality of income and wealth

Answer 5

.Welfare systems
.Labour market policies
.Tax reforms

Question 6

Give three examples of policies used to improve competitiveness

Answer 6

.Improve the functioning of labour markets
.Critical infrastructure investment
.Supporting entrepreneurship
.Macroeconomic stability

Question 7

Give an example of a demand side shock

Answer 7

.Economic downturn/recession in a major trading partner
.Unexpected tax increases or cuts to government spending programmes
.Financial crisis causes bank lending/credit to fall
.Unexpected changes in monetary interest rates
.Significant job losses in a major industry

Question 8

Give an example of a supply side shock

Answer 8

.Steep rise/fall in oil and gas prices
.Political turmoil/strikes
.Natural disasters causing a sharp fall in production and damage to infrastructure
.Unexpected breakthroughs in production technologies
.Significant changes in levels of labour migration into/out of a country

Question 9

Give two policies designed to absorb the effects of an economic shock

Answer 9

.Floating exchange rates
.Freedom to set/adjust monetary policy
.Strong non-price competitiveness of domestic businesses
.A diversified economy that is not reliant on a few sectors