Macroeconomic objectives and policy Flashcards
What are the main objectives of macroeconomic policy?
- economic growth: often regarded as fundamental objective. Widely regarded as critical in order to achieve other macroeconomic objectives
- sustainable growth: ability to meet needs of present generation without compromising needs of future generations e.g. economic growth can rapidly deplete natural resources, creation of external costs. Also sustainable growth in terms of time in general?
- a low and stable inflation rate: high inflation rates can damage international competitiveness, deflation can cause vicious circle of depression
- full employment: aim is natural rate of unemployment
- balance of payments equilibrium on current account: huge deficits may result in violent changes in exchange rate of countries currency, contributing to instability of whole economy
- redistribution of income: use of progressive taxes to redistribute income
- fiscal balance: may be unsustainable - makes it harder for country to sell gov. bonds to finance deficit
What are the main causes of shifts in AD?
- asset prices
- interest rates
- foreign direct investment
- tax rates
- expectations about future state of economy
- decisions by gov. on its expenditure
- the exchange rate
What are the main causes of shifts in the SRAS curve?
- changes in wage rates (inc. in rate will raise CoP and ∴ shift SRAS left
- new legislation (e.g. tougher regulations inc. CoP and ∴ shift SRAS left)
- changes prices of raw materials/ components (fall in commodity prices cause SRAS to shift right)
- changes in firm taxation (if higher would inc. CoP and ∴ shift SRAS left)
What are the main causes of shifts in the LRAS curve?
- technological change
- size of labour force: influenced by both natural rate of population growth and migration
- human capital: greater skill set of workforce, greater productivity
- capital stock: capital deepening will result in greater productivity
- raw materials: discovery of new rm will shift LRAS right
What is monetary policy?
use of interest rates, money supply & exchange rate in order to influence the level of economic activity in a country
What are the main aspects of monetary policy?
- inflation targets (2%+/- 1%)
- interest rate changes (used to achieve inflation target):
- quantitative easing
What are the main issues surrounding the use of interest rates to control inflation?
- can take 18-24 months to work through economy
- can strengthen currency, making countrys goods less competitive
What is quantitative easing?
Central bank buys up gov. & corporate bonds from commercial banks and other financial institutions. This increases their deposits, thereby giving them ability to lend more easily to customers.
What are the drawbacks of quantitative easing?
- policy is unlikely to be effective if banks are risk averse and remain unwilling to lend unless loan is risk free
- increased money supply could unleash a serious bout of inflation (based on monetarist belief in quantity theory of money)
What is fiscal policy?
use of government expenditure & taxation to influence the level of economic activity in a country
What are the 2 main features of fiscal policy?
- Automatic stabilisers: revenues/ expenditure of some taxes change automatically in line with changes in economy e.g. welfare payments
- Discretionary fiscal policy: deliberate use of changes in taxes to achieve gov. macroeconomic objectives
When is fiscal policy most effective
when value of multiplier is high
What are the drawbacks of fiscal policy?
- may be significant time lags e.g. building new hospital takes time for planning, purchasing land etc.
- if direct taxes increased, could be disincentive effects e.g. higher corporation tax could reduce investment
- difficult to determine magnitude of changes in public expenditure in advance due if multiplier value unknown
What are supply-side policies?
policies aimed at increasing AS by increasing competition and incentives. Usually microeconomic policies (policies target specific markets)
What are the main supply side policies aimed at the labour market?
- reduction in trade union power e.g. making sympathy strikes illegal
- reduction in unemployment benefits (inc. incentive to get work)
- improvements in human capital e.g. by increasing quality of education
- reduction in employment protection legislation e.g. making it easier to fire workers
- reduction in income tax rates: aim to increase incentives to work (can be analysed with Laffer Curve)
