Macroeconomic Objectives And Policies Flashcards
What’s the long run trend of economic growth?
2.5%
macro objectives
- growth
- low unemployment
- low and stable inflation
- balance of payments equilibrium
- balanced budget
- sustainability
- increased equality
What are demand side policies?
Policies designed to increase consumer demand so that total production increases
What is monetary policy?
- used by gov to control money flow of the economy
- done with interest rates and quantitative easing
- conducted by BofE
What is fiscal policy?
- Uses gov spending and revenues from tax to influence AD
- conducted by gov
Fiscal policy instruments
Gov spending and taxation:
- as one increases the other decreases
- sims to stimulate growth and stabilise economy
What is expansionary fiscal policy?
- aims to increase AD
- increase G and/or decrease T
- worsens deficit
Deflationary fiscal policy
- decrease AD
- G decreases and/or T increases
- improved deficit
When does the government have a budget deficit ( fiscal ) ?
When expenditure exceeds tax receipts in a financial year
When does the gov have a budget surplus ( fiscal ) ?
When tax receipts exceed expenditure
Limitations of fiscal policy
- gov might have imperfect info about economy
- time lag
- if gov borrows from private sectors there’s less funds available for private sector - crowding out
- the bigger he multiplier the bigger the effect on AD and the more effective the policy
- if there’s high interest it might not be effective in decreasing D
- difficulties paying back debt - harder to borrow in the future
Monetary policy instruments
- interest rates
- QE
Who alters the interest rats to control money supply
Monetary policy committee ( MPC )
A reduction in the base rate of interest will lead to a rise in what?
AD
How does the base rate lead to a rise in AD?
- consumption and investment increase due to lower borrowing costs
- asset prices will increase leading to positive wealth effect
- less saving
- demand of pound falls
QE
Limitations of monetary policy
- banks might not pass base rate onto consumers
- some banks unwilling to lend
- if some consumers have less confidence they’re less likely to spend and same for firms with investment
When did the Great Depression start?
1929
What happened to GDP following 1929?
By 1933 real GDP had fallen by 30%
What happened to unemployment following 1929?
By 1933 it increased to 25%
How long did the Great Depression last?
10 years
Who shifted macroeconomic thought from a focus on AS to AD
Keynes - to close gaps between actual and potential output
What happened to confidence in relation to the Great Depression?
Huge loss in business and consumer confidence- decreasing consumption and investment
Uk responses to Great Depression
- gov cut public sector wages and unemployment benefits and raised income tax
- high interest rates to maintain £
- eventually cut interest rates
What was the global financial crisis?
Refers to the decline in world GDP in 2008-2009
Causes of global financial crisis
- BEFORE there were high asset prices and boom in demand
- risky bank loans and mortgages - borrowers had poor credit histories
- banks lost huge funds and needed bailouts from gov
Policy responses to the global financial crisis
- nationalise banks and building societies
- expansionary monetary policy
- cut VAT
- gov borrow more
- USA used expansionary fiscal policy and recovered faster
What are market based policies
- They limit the intervention of the gov and allow the free market to eliminate imbalances
- forces of supply and demand are used
What do interventionist policies rely on
Gov intervention
3 market based policies
- increase incentives
- promote competition
- reform labour market
What does increasing incentives include
- reducing income and corporation tax to encourage spending and investment
- reducing benefits to increase OC of being out of work
What does promoting competition involve?
- deregulating/ privatising public sector so firms can compete in a competitive market
- helps to improve efficiency
What does reforming the labour market involve?
- reducing or abolishing NMW to allow free market forces to acclimate wages and the labour market should clear
- reducing trade union power - employing workers becomes less restrictive nd increases mobility of labour making labour market more efficient
4 interventionist policies
- promote competition
- reform labour market
- improve quality and skills of labour force
- improve infrastructure
Promoting competition
- stricter gov competition policy could help reduce the monopoly power of some firms so smaller firms can compete too
Reforming the labour market
Gov can try to improve geographical mobility of labour by subsidising relocation of workers and improving availability of job vacancy info
How can the gov improve the labour force?
- subsidise training
- spend more on education
- spend more on healthcare
- help reduce occupational immobility
How can the gov improve infrastructure?
- spend more
- improve roads and schools etc
When a supply side policy is employed what way does the LRAS curve shift and why?
- shifts right
- max output at full employment has increased
- fall in price and increase in national output
Strengths of supply side policies
- only policies that deal with structural employment because labour market cane be directly improved with education and training
Weaknesses of supply side policies
- demand side are better at dealing with cyclical unemployment as they can reduce negative output gap size and shift AD right
- time lags
- not always successful
- can lead to more inequality ( of wealth eg. When reducing tax rates )
- increased deficit
- inflationary effects - may impact AD before AS
- no impact if lots of spare capacity
How is growth linked with inflation?
Growing economy more. Likely to experience inflation especially when POG and Ad increases faster than AS
How is growth linked with current account?
During growth there’s more spending and a higher MPM so worsening of current account deficit
How is growth linked with the deficit?
- Reducing the deficit means higher tax revenue and lower gov spending
- leads to fall in AD and less growth
How is growth linked to the environment?
- high growth rates mean high levels of negative externalities
- due to more manufacturing
How is unemployment linked to inflation?
- the Phillips curve illustrates the short run trade off between the 2
- as growth increases unemployment falls due to more jobs created
- causing wages to increase leading to more spending and increased inflation
- can be limited if supply side policies used to reduce structural unemployment which wont increase wages
The Phillips curve
When do policy conflicts and trade offs occur?
- when 1 macro policy has a larger impact than another
- reduces effectiveness
What are the unintended consequences connecting the environment and competitiveness?
- if green taxes like carbon taxes are implemented the competitiveness is compromised
- they’re limited in production
What are the unintended consequences connecting fiscal and monetary policy?
- expansionary fiscal policies involve more government borrowing
- cause interest rates and inflation to rise
What are the unintended consequences connecting interest rates and inequality?
- low interest rate could affect distribution of income
- small return on savings
