Macroeconomic objectives and policies

Question 1

7 major macroeconomic objectives

Answer 1

1. Economic growth
2. Reduction in unemployment
3. Control of inflation- 2% for UK
4. Restoration of equilibrium in balance of payments
5. Fiscal balance
6. Protection of the environment
7. Making distribution of income more equal

Question 2

Demand side policies

Answer 2

Deliberate action taken by government/monetary authorities to shift AD

Question 3

Monetary policy

Answer 3

Policy by the central bank/gov- management of MS & IR & is the demand side economic policy used by the government of a country to achieve macroeconomic objectives

Question 4

Fiscal policy

Answer 4

Use of government spending, direct and indirect taxation and government borrowing to affect the level and growth of aggregate demandin the economy, output and jobs

Question 5

Monetary policy instruments

Answer 5

Interest rates and QE

Question 6

Interest rates

Answer 6

Lower interest rates (better to borrow and spend/consume) means that AD increases, and vice versa- set by MPC of Bank of England

Question 7

QE

Answer 7

Central bank makes money electronically by buying illiquid assets; bonds and financial assets from financial market

Question 8

fiscal policy instruments

Answer 8

G, T (direct and indirect), government borrowing

Question 9

Direct tax

Answer 9

A tax, like income tax or corporation tax, which is levied on the income or profits of the person who pays it, rather than on goods or services.

Question 10

Indirect tax

Answer 10

A tax levied on goods and services (and spending) rather than on income or profits, such as VAT

Question 11

G in fiscal policy

Answer 11

Government can run a budget deficit or surplus when involved in fiscal policy

Question 12

Progressive tax

Answer 12

Tax rate increases as the taxable amount increases

Question 13

Regressive tax

Answer 13

Tax rate decreases as the taxable amount increases

Question 14

Strengths of demand side policies (4)

Answer 14

1. Only way to get out of cyclical unemployment
2. Multiplier is large –> significant effect on growth
3. Spare capacity –> growth happen quickly
4. Can be used to control demand pull inflation

Question 15

Weaknesses of demand side policies (4)

Answer 15

1. Can cause inflation in LR
2. Multiplier might be low and have little effect
3. No space capacity –> supply side are needed for economic growth
4. Government can have a large deficit- adds to national debt