Macroeconomic objectives and policies (MAC)

Question 1

What are the main macroeconomic objectives?

Answer 1

Greater income equality

Economic growth

Low unemployment

Low and stable rate of inflation

Balanced government budget

Balance of payments equilibrium

Protection of environment

Question 2

What is a demand side policy?

Answer 2

Is any deliberate action taken by governments or monetary authorities to shift the AD curve.

Question 3

What are the two types of demand side policy?

Answer 3

Monetary policy: manipulation of monetary variables in order to influence the level of AD

Fiscal policy: the manipulation of government spending and taxation in order to influence the level of AD

Question 4

What is an interest rate?

Answer 4

the cost of borrowing or the reward for saving

Question 5

What is quantitative easing?

Answer 5

Refers to the buying of government assets by the central bank in order to increase money supply and stimulate the economy

Question 6

What is the base interest rate?

Answer 6

It is the interest rate that the central bank will charge commercial banks for loans

Question 7

How do the use of interest rates decrease aggregate demand?

Answer 7

If the rate of inflation is above its target level then the central bank may raise the base interest rate in order to decrease AD

Question 8

How do the use of interest rates increase aggregate demand?

Answer 8

If the rate of inflation if below the target level then the central bank will reduce the base interest rates in order to increase AD

Question 9

What are the components of fiscal policy?

Answer 9

Government expenditure

Direct taxes

Indirect taxes

Question 10

How is fiscal policy used to reduce AD?

Answer 10

Reduce government expenditure and increase taxes

Question 11

How is fiscal policy used to increase AD?

Answer 11

Increase government expenditure and decrease taxes

Question 12

What is a budget deficit?

Answer 12

If the government spends more than it receives in taxation

Question 13

What is a budget surplus?

Answer 13

If the government spends less than it receives in taxation

Question 14

What are the strenghts of demand side policies?

Answer 14

If the multiplier is large they can have a significant impact on growth

If there is spare capacity the economy can grow quickly

If used to control demand pull inflation they can act quickly and solve the problem

Question 15

What are the weaknesses of demand side policies?

Answer 15

The multiplier might be so low that they have little effect

If there is no spare capacity then supply side policies are needed instead in order to achieve economic growth

If used to stimulate the AD the government can end up running a huge budget deficit which adds to national debt

Question 16

What are market based supply side policies?

Answer 16

These policies work through the market mechanism

They are designed to:

increase incentives
increase competition
reduce bureaucracy

Question 17

What are interventionist supply side policies?

Answer 17

They involve government intervention in order to overcome market failures.

They are related to measures which involve government expenditure designed to increase productivity

Question 18

What are the specific components of market based policies?

Answer 18

Increased incentives for workers

Labour market reforms

Reduction in corporation taxes

Increased competition

Removing regulation that are preventing firms from growing

Question 19

What are the specific components of interventionist policies?

Answer 19

Improving skills and quality of workforce

Incentives for investment

Investment in infrastructure

Finance for business start ups

Investment in new technology

Question 20

What are the strenghts of supply side policies?

Answer 20

economic growth can be achieved without inflationary pressures

some supply side policies help to increase productivity

supply side policies may be used to achieve economic growth when there is no or limited spare capacity

they are less likely to cause a conflict with other macroeconomic objectives

Question 21

What are the weaknesses of supply side policies?

Answer 21

If AD is very low then supply side policies would have no impact

Interventionist policies may be very expensive

They take considerable time to work

Some supply side policies might increase income inequality

Question 22

What is a trade off?

Answer 22

Occurs when an objective is achieved only at the expense of some other objective.