Macroeconomic Policies

Question 1

Define ‘budget surplus’.

Answer 1

When the government’s income is greater than their expenditure

Question 2

Define ‘budget deficit’.

Answer 2

When the government’s expenditure is greater than their income

Question 3

What is fiscal policy and what are its two ‘instruments’?

Answer 3

The use of government spending, taxation and no borrowing to achieve macroeconomic objectives
Government spending
Taxes

Question 4

What are the two types of government expenditure?

Answer 4

Mandatory spending - pensions, unemployment benefits

Discretionary spending - building new schools and infrastructure

Question 5

What are the two types of taxes used in fiscal policy?

Answer 5

Direct taxes - imposed on individuals and firms

Indirect taxes - placed on spending eg. VAT

Question 6

State and explain the two types of fiscal policy.

Answer 6

Expansionary - lower taxes and increase government spending to boost the economy and increase AD

Contractionary - increases taxes and lower government spending to slow down the economy and decrease AD

Question 7

What is the aim and 6 steps of fiscal policy being used to combat inflation?

Answer 7

Aim: Stable prices
1. Too much inflation - AD growing too fast (Boom)
2 Pursue contractionary policies (FP)
3. Taxation↑, Govt. spending↓
4. Consumer's disposable income↓
5. C↓, AD↓
6. Inflationary pressure is reduced

Question 8

What is the aim and 6 steps of fiscal policy being used to combat a recession?

Answer 8

Aim: Economic growth
1. Recession - low AD (Bottom of the cycle)
2 Pursue expansionary policies (FP)
3. Taxation↓, Govt. spending↑
4. Consumer's disposable income↑
5. C↑, AD↑
6. Economic growth is stimulated

Question 9

What are the 6 steps of fiscal policy being used to combat a current account deficit?

Answer 9

1. Heavy reliance on imports and low exports (M > X)
2. Domestic incomes are high
3. Pursue contractionary policies (FP)
4. Taxes↑
5. Disposable income↓
6. Less demand for imports - current account deficit reduced

Question 10

What are the 3 types of taxation?

Answer 10

Progressive - more income you earn, the greater the tax

Proportional - everyone pays the same percentage based on their income

Regressive - everyone pays the same tax regardless of income, affects poor more than wealthy

Question 11

What are the 3 advantages of fiscal policy?

Answer 11

Government can stimulate/simmer the economy

Can be localised on areas, industries and income groups that need it the most

Government capital spending can increase quality of factors of production in the economy

Question 12

What are the 3 disadvantages of fiscal policy?

Answer 12

Time lags/time gaining approval and effect

Conflicts with other macroeconomic objectives

Can have impacts on the government budget/national debt

Question 13

What 5 factors are used to evaluate fiscal policy?

Answer 13

Size of income tax cut - detrimental to standards of living?

Type of tax rise/cut - regressive?

Impact on budget deficit - capacity to spend?

Focus on particular region - benefits everyone?

Consumer confidence - people likely to spend or save?

Question 14

Define ‘base rate’.

Answer 14

The minimum interest rate commercial banks are permitted to lend at

Question 15

Define ‘interest rates’.

Answer 15

The price of borrowing and the reward for saving

Question 16

What is the effect of the base rate on commercial banks’ interest rates?

Answer 16

Base rate ↓, IR ↓

Base rate ↑, IR ↑

Question 17

What are the 2 effects of increased interest rates on the economy?

Answer 17

Consumers - incentivised to save, less likely to borrow

Firms - reluctant to invest

Question 18

What are the 6 steps of quantitative easing?

Answer 18

1. Electronically created money for Bank of England
2. Central Bank buys back government bonds from commercial banks, pension funds and insurance firms
3. Central Bank gives firms more cash to spend
4. Investment into small firms encouraged - injection into circular flow
5. Greater investment (I↑) and consumption (C↑)
6. AD↑

Question 19

What are the 6 steps of monetary policy being used to combat inflation?

Answer 19

1) Too much inflation
2) Pursue contractionary policies (MP)
3) Interest rates ↑, Quantitative easing ↓
4) C↓, I↓
5) (X - M)↓, AD↓
6) Inflation is reduced

Question 20

What are the 6 steps of monetary policy being used to combat a current account deficit?

Answer 20

1) Economy struggling with current account deficit
2) Pursue contractionary policies (MP)
3) IR↑, QE ↓ - attractive to save
4) M↓
5) (X - M)↑, AD↑
6) Current account deficit is reduced

Question 21

What are the 6 steps of monetary policy being used to combat high unemployment?

Answer 21

1) Too much unemployment
2) Pursue expansionary policies (MP)
3) Interest rates ↓, Quantitative easing ↑
4) More attractive to borrow, less attractive to save
5) C↑, I↑, (X - M)↑, AD↑
6) Unemployment is reduced

Question 22

What are the 6 steps of monetary policy being used to combat low economic growth?

Answer 22

1) Economic growth is slow
2) Pursue expansionary policies (MP)
3) Interest rates ↓, Quantitative easing ↑
4) C↑, I↑, (X - M)↑
5) AD↑, GDP↑
6) Economic growth increases

Question 23

What are the 3 advantages of monetary policy?

Answer 23

Direct and powerful effect on household spending

Interest rates can be adjusted quickly and frequently

Arguably quicker than fiscal policy

Question 24

What are the 4 disadvantages of monetary policy?

Answer 24

Policy trade-offs - trying to achieve one policy will lead to another being unsatisfied

Some time lags in it taking effect

Low interest rates in a deep recession may not work - people lack confidence to spend

Quantitative easing difficult to control - interest rates preferred

Question 25

What 3 factors does the effectiveness of monetary policy depend on?

Answer 25

The size of the interest rate increase/reduction

Consumer and investor confidence

Proportion of people affected

Question 26

What do supply-side policies aim to do?

Answer 26

Improve the quality and quantity of the factors of production

Question 27

What are the four types of supply-side policies?

Answer 27

Labour market policies
Incentive-related policies
Product market policies
Capital market policies

Question 28

What are the 3 types of labour market policies?

Answer 28

Improving health and education
Restoring work incentives for workers
Reducing trade union power/minimum wage

Question 29

What are the 3 types of incentive-related policies?

Answer 29

Lowering taxes on work and enterprise
Incentive to invest in R&D
Incentive to invest in capital

Question 30

What are the 3 types of product market policies?

Answer 30

Privatisation
Deregulation
Helping small firms

Question 31

What are the 3 types of capital market policies?

Answer 31

Investment in infrastructure
Investment into technology
Investment into R&D

Question 32

What are the 6 advantages of supply-side policies?

Answer 32

Achieves economic growth and low/steady inflation without any tradeoff

Encourages R&D - better quality of goods and services, SOL↑

Induces competition

Increases productivity

Encourages innovation

Higher incomes for workers

Question 33

What are the 5 disadvantages of supply-side policies?

Answer 33

Some can cause harm to consumers, workers or the environment

Time lags - takes time for benefits to be repeated

Expensive - worsens the government budget

Difficult to get them politically approved

Some can increase income inequality

Question 34

What are the 4 types of policy trade-offs?

Answer 34

Inflation vs Economic growth
Inflation vs Unemployment
Economic growth vs Current account deficit
Economic growth vs Environmental damage

Question 35

What are the 6 features of a boom where contractionary demand-side policies are used?

Answer 35

Unsustainably high economic growth
High inflation
Very low unemployment
High current account deficit
Greater environmental damage
Rising inequality

Question 36

What are the 6 features of a recession where expansionary demand-side policies are used?

Answer 36

Low economic growth
Low inflation
Very high unemployment
Low current account deficit
Lower environmental damage
Falling/rising inequality