Macro objectives and policies Flashcards
what are the 4 key macroeconomic objectives?
economic growth
low unemployment
low and stable inflation
Balance of payment equilibrium on the current account
what are the other macroeconomic objectives?
Balance government budget
protection of the environment
greater income equality
what are demand side policies?
policies designed to manipulate consumer demand
what is expansionary policy aimed at?
increasing AD to bring about growth
what is deflationary policy aimed at?
attempts to decrease AD to control inflation.
what is monetary policy?
where the central bank or regulatory authority attempts to control the level of AD by altering base interest rates or the amount of money in the economy.
what are interest rates?
the reward for savings and the cost of borrowing expressed as the % of money saved or borrowed
What are the 2 types of monetary policy?
Expansionary policy (low interest, higher money supply, devalue currency) - BOOSTS AD and increases inflation
Contractionary (high interest, lower money supply, higher exchange rate) - REDUCES AD and inflation
Evaluation of monetary policy
Pros
- Affects C+I+G and (X-M). There are further gains if there is a positive multiplier
- Can increase both AD and AS
Cons
- Causes demand-pull inflation as AD shifts right
- Time lag - interest rates take around 18 months to change
- Depends on confidence - consumers and firms may not consume or invest more if confidence is low
3 effects of a low interest rate?
- Increased demand for loans - demand for housing (mortgages) increases - house prices increase
- Disposable income of those with mortgages increases - cost of borrowing decreases - mortgage repayments fall - more disposable income
- Exchange rate falls - less hot money flows - less demand for currency. — However exports become cheaper so current account and AD improve
