Macroeconomic objectives and policies

Question 1

What are the macroeconomic objectives?

Answer 1

1. economic growth
2. low unemployment
3. low and stable rate of inflation
4. balance of payments equilibrium on current account
5. balanced government budget
6. protection of the environment
7. greater income equality

Question 2

What are demand side policies?

Answer 2

Policies used to deliberately manipulate AD to achieve macroeconomic objectives.

Question 3

What are the types of demand side policies?

Answer 3

1. Fiscal policy (government spending and taxation to change level of spending)
2. monetary policy (interest rates and quantitative easing to influence decision making)

Question 4

What is quantitative easing?

Answer 4

purchasing assets (government bonds) to increase money supply

Question 5

What is a fiscal deficit?

Answer 5

The amount by which government spending exceeds revenues.

Question 6

What is a fiscal surplus?

Answer 6

The amount by which tax revenues exceed government spending

Question 7

What is expansionary monetary policy?

Answer 7

Decreasing interest rates and/or increasing money supply.

Used when an economy is in a recession and unemployment is high

Question 8

What is contractionary monetary policy?

Answer 8

Increased interest rates and/or decrease in money supply.

Used when economic growth is unstable and inflation is high.

Question 9

What are the problems with monetary policy?

Answer 9

• 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

Question 10

What is expansionary fiscal policy?

Answer 10

Decreased taxes and/or increased government spending.

Question 11

What is contractionary fiscal policy?

Answer 11

Increased taxation and/or decreased government spending.

Question 12

What are the problems with fiscal policy?

Answer 12

1. Time lags
2. Expansionary bias ; no gov would implement
3. execution ; difficult to implement
4. trade deficits ; higher trade deficit as incomes increase = increased expenditure on imports and increase negative trade balance
5. crowding out ; when big governments borrows money which leads to high interest rates for the private sector = decreased private investment

Question 13

What is a supply side policy?

Answer 13

Involves improving the supply of an economy (eg productivity, resource availability, regulations)

Question 14

What are the types of supply side policies?

Answer 14

Market based and interventionist

Question 15

What are the methods for a market based supply side policy?

Answer 15

• Increase competition
• Improve motivation by cutting tax rates
• increase price flexibility and signalling in the market by lowering minimum wage

Question 16

What are interventionist methods based on supply side policies?

Answer 16

• Improve education and training
• Improve health
• Improve infrastructure

Question 17

What are the disadvantages of supply side policy?

Answer 17

• time lags
• expensive
• unpopular

Question 18

How might you reduce high inflation?

Answer 18

By reducing AD, however it leads to a recession and cyclical unemployment

Question 19

How might you increase low growth?

Answer 19

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

Question 20

How might you fix high unemployment?

Answer 20

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

Question 21

How might you fix a bad current account on the balance of payments?

Answer 21

By cutting imports through low consumer consumption and investment. However this increases unemployment resulting in AD falling and thus demand for domestic goods

Question 22

How would you reduce a fiscal deficit?

Answer 22

Cut spending and increase tax. however this increases unemployment and lowers economic growth in the short run

Question 23

How would you lower income and wealth inequality?

Answer 23

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.

Question 24

How might a government avoid environmental deterioration?

Answer 24

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

Question 25

What might you use expansionary demand side policies for?

Answer 25

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.

Question 26

What might you use contractionary demand side policies for?

Answer 26

To reduce inflation and improve the current account.

However, it results in lower economic growth and high unemployment