Macroeconomic Policies Globally

Question 1

What are the 2 types of fiscal policy?

Answer 1

1) Expansionary fiscal policy.
2) Contractionary/deflationary fiscal policy.

Question 2

What is expansionary fiscal policy?

Answer 2

The use of taxes, government borrowing and public spending to stimulate the economy and increase AD.

Question 3

What is deflationary/contractionary fiscal policy?

Answer 3

The use of taxation and reduced public expenditure to reduce the level of AD in the economy, potentially to combat inflation.

Question 4

What is demand management?

Answer 4

A Keynesian approach to economic management, where the government plays a key role in influencing AD, through taxes, government spending, monetary policy, and other approaches.

Question 5

What is the impact of expansionary fiscal policy on AD and the fiscal balance (explain)?

Answer 5

A reduction in taxes will stimulate investment and increase public expenditure. However, increased public sector borrowing will lead to a higher fiscal debt. This will increase AD.

Question 6

What is the impact of deflationary/contractionary fiscal policy on AD and the fiscal balance (explain)?

Answer 6

An increase in taxation will discourage consumer spending, reducing public expenditure. There will be a reduction in public sector borrowing, lowering the fiscal debt (or becoming a surplus). This will reduce AD.

Question 7

What is the impact of deflationary/contractionary fiscal policy on the national debt?

Answer 7

It will reduce the fiscal deficit, therefore lowering the national debt.

Question 8

What is the impact of expansionary fiscal policy on the national debt?

Answer 8

It will increase the fiscal deficit, increasing the national debt.

Question 9

Explain how governments in developed countries can use fiscal policy to reduce inequality (3 ways).

Answer 9

1) Welfare benefits, for the unemployed, low income workers, or for those unable to work.
2) Provision of certain goods/services (e.g. rent subsidies or educational courses).
3) Progressive taxation, reducing the gap between peoples’ disposable income.

Question 10

What is monetary policy?

Answer 10

The use of interest rates, the money supply and exchange rates by a government to achieve economic objectives.

Question 11

What is the effect of lowering interest rates on both the demand and supply side of the economy?

Answer 11

If interest rates fall, borrowing will rise, and saving will fall. This will lead to an increase in consumption and investment, boosting AD. Investment can benefit the supply-side of the economy, improving technology and infrastructure, and therefore productivity.

Question 12

Why is monetary policy difficult to implement (2)?

Answer 12

1) It is near impossible to accurately measure the money supply.
2) Control of inflation is becoming more difficult due to the increase in globalisation.

Question 13

What is the UK vs the EU’s target for inflation (CPI measured)?

Answer 13

1) The UK: 2% (symmetric target, as it has to be within ±1%)
2) The EU: 2% (asymmetric target, as it has to be lower than 2%)

Question 14

What are supply side policies?

Answer 14

Policies that aim to increase the productive potential of the economy, increasing its LRAS.

Question 15

Give examples of some supply-side policies.

Answer 15

1) Reforming the labour market.
2) Improving healthcare.
3) Building new infrastructure.
4) Improving the quality of the workforce.
5) Increased incentives to work/invest.
6) Promotion of competition (deregulation, privatisation, etc.).

Question 16

What are 5 possible benefits of supply-side policies?

Answer 16

1) Improved international competitiveness.
2) Improved productivity.
3) Lower average costs for firms.
4) Lower unemployment.
5) Less reliance on imports through an increase in exports.

Question 17

What is exchange rate policy?

Answer 17

Policies implemented by the central bank to allow the exchange rate to deviate from its equilibrium rate.

Question 18

How do interest rates influence the exchange rate?

Answer 18

A rise in the interest rate is likely to attract hot money, increasing the demand for pounds (£), raising the exchange rate.

Question 19

What are 3 impacts of using exchange rate policy to lower the exchange rate?

Answer 19

1) Increases international competitiveness if it keeps the exchange rate below the equilibrium.
2) A reduction in the exchange rate will lower the price of exports, leading to higher demand and an increase in AD.
3) A reduction in the exchange rate can make imports more expensive, resulting in cost-push inflation.

Question 20

What are direct controls?

Answer 20

A government measure imposed on the price or quantity of a product or factor of production. These forms of control work outside the market system.

Question 21

What are 5 examples of a direct control?

Answer 21

1) Maximum price controls, e.g. to control the price of food in developing countries.
2) Minimum guaranteed prices, e.g. national minimum wage.
3) Fixing quotas on imports.
4) Limiting the amount of foreign currency that a citizen can buy a year.
5) Fixing maximum interest rates that payday lenders can charge their customers.

Question 22

What are external shocks?

Answer 22

Unpredictable events that affect the global financial system. E.g. sudden price changes, financial crises, or conflict/war.

Question 23

What are 4 possible measures to control transnational corporations?

Answer 23

1) Requirement that local factors of production (e.g. labour) are used.
2) Requirement that the global company exports a certain proportion of its output.
3) Transfer pricing.
4) Requirement to set up joint ventures with technology transfer to the domestic firm.

Question 24

What is transfer pricing (2)?

Answer 24

1) A technique to move profits around from parent companies to subsidiaries and affiliates to ensure funds are evenly distributed.
2) However, many multinational corporations use it as a tactic to lower their tax burden.

Question 25

What is meant by ‘footloose’?

Answer 25

The ability to move to another country easily and with little cost.

Question 26

What are 3 problems potentially facing policymakers when applying macroeconomic policies?

Answer 26

1) Inaccurate/out of date information.
2) Risks and uncertainties.
3) The inability to control external shocks

Question 27

How can inaccurate/out of date information affect policymakers when applying macroeconomic policies?

Answer 27

If GDP, unemployment, trade deficit, etc. figures are inaccurate/out of date, it means that policies may not have the desired effect, as policymakers will be working with false information.

Question 28

How can risks and uncertainties affect policymakers when applying macroeconomic policies (2)?

Answer 28

1) It is difficult for policymakers to predict the impact of some policies, e.g. QE, creating uncertainty.
2) Policymakers may be uncertain of the future behaviour of firms and consumers, making policies harder to plan. Risk of failure makes policymakers debate whether a policy should be implemented.

Question 29

How can the inability to control external shocks affect policymakers when applying macroeconomic policies?

Answer 29

As the world has become increasingly globalised, it is near impossible for a country to isolate itself from external shocks.