Macroeconomic objectives and policies Flashcards
What are the macroeconomic objectives?
- economic growth
- low unemployment
- low and stable rate of inflation
- balance of payments equilibrium on current account
- balanced government budget
- protection of the environment
- greater income equality
What are demand side policies?
Policies used to deliberately manipulate AD to achieve macroeconomic objectives.
What are the types of demand side policies?
- Fiscal policy (government spending and taxation to change level of spending)
- monetary policy (interest rates and quantitative easing to influence decision making)
What is quantitative easing?
purchasing assets (government bonds) to increase money supply
What is a fiscal deficit?
The amount by which government spending exceeds revenues.
What is a fiscal surplus?
The amount by which tax revenues exceed government spending
What is expansionary monetary policy?
Decreasing interest rates and/or increasing money supply.
Used when an economy is in a recession and unemployment is high
What is contractionary monetary policy?
Increased interest rates and/or decrease in money supply.
Used when economic growth is unstable and inflation is high.
What are the problems with monetary policy?
- Consumption and investment aren’t only dependent on interest rates (also confidence)
- interest rates near 0 = can’t be reduced any more = useless tool
- time lags = takes several months
- firms and households can still borrow internationally
What is expansionary fiscal policy?
Decreased taxes and/or increased government spending.
What is contractionary fiscal policy?
Increased taxation and/or decreased government spending.
What are the problems with fiscal policy?
- Time lags
- Expansionary bias ; no gov would implement
- execution ; difficult to implement
- trade deficits ; higher trade deficit as incomes increase = increased expenditure on imports and increase negative trade balance
- crowding out ; when big governments borrows money which leads to high interest rates for the private sector = decreased private investment
What is a supply side policy?
Involves improving the supply of an economy (eg productivity, resource availability, regulations)
What are the types of supply side policies?
Market based and interventionist
What are the methods for a market based supply side policy?
- Increase competition
- Improve motivation by cutting tax rates
- increase price flexibility and signalling in the market by lowering minimum wage
What are interventionist methods based on supply side policies?
- Improve education and training
- Improve health
- Improve infrastructure
What are the disadvantages of supply side policy?
- time lags
- expensive
- unpopular
How might you reduce high inflation?
By reducing AD, however it leads to a recession and cyclical unemployment
How might you increase low growth?
By increasing AD in the short run, which will lower unemployment and increase inflation which will result in increased demand for imported goods hence worsening the current account
OR
By increasing long run AS which will lower wage rates and result in high income inequality
How might you fix high unemployment?
By increasing AD however its inflationary and will result in current account problems. However this can be fixed by using supply side reforms to provide more jobs but this will result in high inequality if jobs are low paid
How might you fix a bad current account on the balance of payments?
By cutting imports through low consumer consumption and investment. However this increases unemployment resulting in AD falling and thus demand for domestic goods
How would you reduce a fiscal deficit?
Cut spending and increase tax. however this increases unemployment and lowers economic growth in the short run
How would you lower income and wealth inequality?
Direct government intervention by redistributing income through taxes and government spending.
OR
Increase unemployment benefits however this lowers incentive to work and increases long term unemployment resulting in long term growth falling due to failing to reduce inequality in education.
How might a government avoid environmental deterioration?
Implement cleaner technology however this lowers economic growth as investment resources are being diverted into resources that don’t contribute to economic growth. moreover tighter environmental regulation results in lower investment and lower growth which results in high unemployment
What might you use expansionary demand side policies for?
To increase aggregate demand and boost economic growth in the short term by lowering unemployment
However, it results in high inflation and worsening on current account of the balance of payments as imports increase due to demand.
What might you use contractionary demand side policies for?
To reduce inflation and improve the current account.
However, it results in lower economic growth and high unemployment
