Macroeconomic objectives and policies Flashcards
What are the seven major macroeconomic objectives facing countries all over the world?
1) Economic growth
2) Reduction in unemployment.
3) Control of inflation
4) Restoration of equilibrium in the balance of payments.
5) Fiscal balance - taxation equal to government spending
6) Protection of the environment
7) Distribution of income equal
What are demand side policies?
Demand side polices are any deliberate action taken by government or monetary authorities so shift the aggregate demand curve.
What are the two types of demand side policies?
1) Monetary policy - the manipulation of monetary variables in order to achieve government objectives.
2) Fiscal policy - the manipulation of government spending and taxation in order to achieve government objectives.
What are monetary policy instruments and which are the most important?
Monetary policy involves the manipulation of monetary policy instruments, the most important of which are the interest rate and quantitive easing (QE) which is asset purchase to increase the money supply.
How can interest rates be used to bring about a rise or fall in aggregate demand.
If the government desires to bring about a fall in aggregate demand, the interest rate will be raised. As a result, C and (X-M) will tend to fall. The AD curve shifts to the left and the are multiplier effects increasing the impact of the change.
Who sets the interest rate in the UK?
The interest rate is set by the Monetary Policy Committee (MPC) of the Bank of England which meet every month to look at factors which may lead to a rise or fall in prices over the next 18 months or so. The committee takes a vote to determine the interest rate.
How do asset purchases affect money markets?
Governments can purchase long term assets in the money or capital markets, as demand for these assets increases, the price of them rises, leading to a fall in the dividend yield on them. The amount of dividend on the asset relative to price falls. This is the same impact as cutting interest rates but it has a direct impact on the money market.
It means the bonds in the market are more useable and people want to buy them, the holders of bonds know they can be sold. It can mean money markets start working again, which is why QE may be used in a credit crisis.
What is expansionary fiscal policy?
Expansionary fiscal policy involves a government running a government budget or fiscal deficit where government spending (G) is greater than the revenue generated from taxation (T).
What is contractionary fiscal policy?
Contractionary fiscal policy involves a government running a government budget or fiscal surplus, where government spending (G) is less than the revenue received from taxation. (T)
What are the two main types of tax?
1) Direct taxation - on incomes such as income tax or corporation tax.
2) Indirect tax - on spending such as VAT.
Give four strengths of demand-side policies according to Keynesian economics.
1) Demand-sided policies are the only way to get an economy out of demand-deficient unemployment and stagnation, at least in the short run.
2) If the multiplier is large, they can have significant impact on growth.
3) If there is spare capacity, the economy can grow quickly.
4) They can act quickly and solve demand-pull inflation.
Give four weaknesses of demand-side policies according to classical economists.
1) Expansionary demand side policies cause inflation in the long run.
2) The multiplier might be so low that they have little effect.
3) If there is no spare capacity, then supply-side policies are required in order to achieve economic growth.
4) The government can end up running a huge deficit, which adds to the national debt, this can become unsustainable.
What are supply-side policies?
Supply-side policies involve any attempt by the government to shift the aggregate supply curve to the right.
Give four examples of supply-side policies.
1) Cutting corporation tax - incentive for firms to produce more.
2) Removing regulations and restrictions that prevent firms from growing.
3) Encouraging investment by forcing banks to lend more.
4) Making import cheaper - important in UK which relies on imported raw materials.
Why might there be a conflict between objectives in terms of inflation and unemployment?
Increasing interest rates may prevent inflation but it will also mean less spending the economy, which means firms may have to lay off workers because they are unable to sell all of their goods and services.
