Macroeconomic Objectives and Policies Flashcards
What are the 4 main macroeconomic objectives
- Economic growth
- Low unemployment
- Low and stable inflation
- Balance of payments equilibrium on the current account
What is the difference between monetary and fiscal policies
Monetary policy is used by the government to control the money flow of the economy, fiscal policy uses government spending and revenues from taxation to influence AD
What are the monetary policy instruments
- Interest rates: The Monetary Policy Committee alters interest rates to control the supply of money
- Quantitative Easing: This is used by banks to help stimulate the economy when standard monetary policy is no longer effective
What are some limitations of monetary policy
- Banks might not pass the base rate onto consumers so even if the interest rate changes, the intended effect may not occur
- Some banks after 2008 are more risk adverse so loans might not even be given out
- It depends on the confidence of the economy, if the economy is still risky consumers are less likely to spend
What is the fiscal policy instrument
Government spending and taxation: Governments can change the amount of spending and taxation to stimulate the economy (pensions, welfare, education)
What is expansionary fiscal policy
Aiming to increase AD, governments increase spending or reduce taxes. This worsens the government budget deficit
What is contractionary fiscal policy
This aims to decrease AD, governments spending less or increase taxes. This improves the government budget deficit
When does government budget surplus and deficit happen
Deficit - when expenditure exceeds tax in financial year
Surplus - when tax exceeds expenditure
What are some limitations of fiscal policy
- Governments might have imperfect information about the economy and lead to inefficient spending
- There is significant time lag involved with employing fiscal policy which could takes months or years
- If governments borrows funds from the public sector there are fewer funds for the private sector
What are market based and interventionist policies
Market-based: Limit government intervention and allow market to eliminate imbalances
Interventionist: Rely on government intervening on the market
What do market-based policies do
- Increase incentives: Reducing income and corporation tax to encourage spending and investment
- Promote competition: Deregulation or privatising the public sector, firms can compete in a competitive market
What do interventionist policies do
- Promote competition: Stricter government competition policy could help reducing monopoly power of some firms and ensure smaller firms can compete
- To improve skills: The government could subsidies training which also lowers cost for firms since they don’t have to spend on training
- To improve infrastructure: Governments could spend more on infrastructure (roads and schools)
What are some strengths of supply-side policies
- Supply-side policies are the only policies that can deal with structural unemployment
What are some weaknesses of supply-side policies
- Market based supply side policies such as reducing tax could lead to a more unequal distribution of wealth
- There ae significant time lags associated with supply side
- There might be negative impacts on the government budget due to higher expenditure or lower taxes
What are the 4 macroeconomic conflicts
- Economic growth vs the current account: There is likely to be high levels of imports in economic growth
- Economic growth vs the environment: High rates of economic growth is likely to produce negative externalities like pollution
- Unemployment vs inflation: In times of economic growth unemployment falls due to more jobs being created, wages increase which increases spending and increases price
