Macroeconomic Objectives And Policies- Theme 2

Question 1

What are the macroeconomic objectives?

Answer 1

• economic growth
• low unemployment
• low and stable rate of inflation
• BofP equilibrium on current account
• balanced government budget
• protection of environment
• greater income equality

Question 2

Describe difference between monetary and fiscal policy.

Answer 2

• Monetary policy is decision making using monetary instruments such as interest rates and QE.
• fiscal policy is the government’s management of its spending and taxation with the aim of changing total level of spending in the economy

Question 3

Explain interest rates as a monetary policy instrument.

Answer 3

• rise in interest rates increases cost of borrowing for firms and consumers. This will lead to fall in investment and consumption, reducing AD. Higher interest rates require higher rates of return for investment. It also makes ​savings more attractive​, as the interest earnt on them will be higher.
• Higher rates will increase incentive for foreigners to hold money in British banks as they can see a higher rate of return. So there will be increased demand for pounds and the ​value of the pound will rise​. This means imports cheaper, and exports more expensive. This decreases net trade and therefore AD.

Question 4

Explain QE as a monetary policy instrument.

Answer 4

Large-scale purchases of government bonds lower the interest rates or ‘yields’ on those bonds. This pushes down on the interest rates offered on loans (eg mortgages or business loans) because rates on government bonds tend to affect other interest rates in the economy. So QE works by making it cheaper for households and businesses to borrow money – encouraging spending.

Question 5

Define QE.

Answer 5

The purchase of bonds and other illiquid assets as a means of making credit easier to access

Question 6

What are some problems with QE?

Answer 6

-no guarantee that higher asset prices lead into higher consumption through the wealth effect, especially if confidence remains low.
- It is very risky and, if not controlled properly, could cause high inflation and even
hyperinflation

Question 7

What is expansionary fiscal policy?

Answer 7

Cutting taxes and/or raising government spending. So net effect of government’s budget is that AD rises.

Question 8

What is contractionary fiscal policy.

Answer 8

Raising taxes and/or cutting government spending.

Question 9

Define budget (fiscal) deficit

Answer 9

The amount by which government spending exceeds revenues

Question 10

Define budget (fiscal) surplus.

Answer 10

The amount by which tax revenues exceed government spending.

Question 11

What’s the difference between direct and indirect tax?

Answer 11

Direct tax is a tax on incomes whereas indirect tax is a tax on spending.

Question 12

Explain the role and operation of the bank of England’s MPC.

Answer 12

• The ​Monetary Policy Committee (MPC) makes the most important decisions, including the Bank of England base rate and the actions over quantitative easing.
• Main aim is ​keep inflation at 2%
• Committee made up of ​9 people​: 5 from Bank of England, including the Governor of the Bank of England, and the other 4 are independent outside experts, mainly economists

Question 13

What does quantitive mean?

Answer 13

‘Quantitative’ means set amount of money being create.

Question 14

What does easing mean?

Answer 14

‘easing’ refers to reducing pressure on banks