Macroeconomic objectives and policies definitions

Question 1

Fiscal Policy (3)

Answer 1

It refers to changes to government spending, taxation and borrowing levels / to influence the level of aggregate demand, and therefore the level of economic activity in the economy. / It is a type of demand side policy.

Question 2

Expansionary policies (3)

Answer 2

These are any policies aimed to increase the level of real output. / These are most closely associated with demand side policies aimed at increasing growth in the economy.

Question 3

Tightening policies (3)

Answer 3

These are policies aimed to reduce the level of real output. / These are most closely associated with demand side policies aimed at reducing inflationary pressure in the economy.

Question 4

Indirect taxation (3)

Answer 4

These are taxes on expenditure on goods and services, / such as VAT, excise duty or stamp duty. / They can be specific on the units or ad valorem on the value.

Question 5

Direct taxation (2)

Answer 5

These are taxes that are imposed directly on the individual or company paying them. / For example income tax or corporation tax.

Question 6

Budget surplus (1)

Answer 6

The amount each year by which government revenue is greater than government spending.

Question 7

National debt (3)

Answer 7

Total outstanding borrowings of a central government / comprising internal (owing to national creditors) and external (owing to foreign creditors) debt /incurred in financing its expenditure.

Question 8

Output gap (3)

Answer 8

The amount by which a country’s output, or GDP, varies from what it could be given its available resources. / A positive output gap occurs when actual GDP exceeds the productive potential trend GDP of the economy. /A negative output gap is where actual GDP is lower than anticipated trend growth.

Question 9

Fiscal austerity (2)

Answer 9

This involves policies to reduce government spending and or higher taxes in order to try and reduce government budget deficits. / The term is more likely to be used when government spending cuts and higher taxes occur during a recession or period of very weak economic growth

Question 10

Automatic stabilisers (4)

Answer 10

These refer to how fiscal instruments will influence the rate of growth and help counter swings in the economic cycle. / In a period of high economic growth, automatic stabilisers will help to reduce the growth rate. / The government will receive more tax revenues – people earn more and so pay more income tax. There will also be a fall in unemployment so the government will spend less on unemployment benefits. / Both effects will reduce AD.

Question 11

Budget deficit (1)

Answer 11

The amount each year by which government spending is greater than government revenue.

Question 12

Demand side policies

Answer 12

Demand side policies aim to increase aggregate demand. Often done during a recession or when below trend growth. If negative output gap (spare capacity) then they can increase growth rates

Question 13

Austerity measures

Answer 13

Another term for tightening fiscal policies - increase tax or reduce government spending to reduce budget deficit and aggregate demand

Question 14

Monetary policy

Answer 14

Monetary policy is the use of interest rates or quantitative easing to stimulate aggregate demand and economic activity - controlled by the MPC

Question 15

Base interest rates

Answer 15

Rate at which the Bank of England charge commercial banks - controlled by MPC, currently 0.5%

Question 16

Quantitative easing

Answer 16

When a central bank buys assets from financial institutions with created money increasing their liquidity encouraging them to lend more to firms and individuals and causing interest rates to decrease even if base rates are as low as they can go thus allowing businesses to invest and consumers to spend more increasing aggregate demand

Question 17

Phillips curve

Answer 17

describes the inverse relationship between unemployment rates and inflation rates

Question 18

Supply side policies

Answer 18

any policy that improves economy’s productive potential - aim to:
increase incentives
promote competition
reform labour market
improve skills and quality of labour force
improve infrastructure

Question 19

Productivity

Answer 19

level of output per unit of input per time period e.g. labour productivity could be measured as output per worker per hour

Question 20

National minimum wage

Answer 20

minimum pay per hour almost all workers are entitled to. May 2016 £5.30 per hour for 18-20 year olds. National living wage > national minimum wage for those aged over 25 - from April 2016 this was £7.20 per hour

Question 21

Privatisation

Answer 21

transfer of owenership from government to private sector aiming to increase competition and promote improved productivity of operations e.g. Royal mail

Question 22

Deregulation

Answer 22

reduction or elimination of government regulations in an industry to create more completion e.g. financial services industry has been partially deregulated