macroeconomic policies in a global context

Question 1

what are direct controls?

Answer 1

A control that is directly imposed upon the manufacturing, pricing and distribution of specific goods
include minimum/maximum prices/wages , quotas on imports, limits on currency or regulation

Question 2

what can the govt do to reduce fiscal deficit and national debt?

Answer 2

austerity
cut out waste
through demand stimulus
automatic stabilisers
default on their loans

Question 3

how can the govt use austerity to reduce national debt + evaluation?

Answer 3

• for example the UK has been using austerity to reduce national debt
  
  • attempt to dec spending
  • and also they could inc tax rates
• however these could limit growth, reduce living standards and income inequality

Question 4

how do free market economists say spending can be reduced?

Answer 4

• free market economists say spending can be reduced by cutting out waste
  
  • highly unlikely that these efficiency savings would make a significant difference

Question 5

what can you reduce national debt by demand stimulus?

Answer 5

• demand stimulus by high spending
  
  • this will cause economic growth
  • therefore will bring about higher tax rates
  • this will allow for a budget surplus
  • eventually reduce national debt

Question 6

how can automatic stabilisers be used to reduce national debt?

Answer 6

• allow the economy to grow so national debt/ fiscal deficit will reduce as a % of GDP
• eg US did this after the global financial crisis

Question 7

how does a govt defaulting on their loans reduce national debt?

Answer 7

• another way for govt to reduce national debt would be for them to default on their loans
  
  • but the economic cost of this is so large that gov will only do this is its the only option

Question 8

what do right and left wing believe when it comes to income?

Answer 8

• those on the right argue that high incomes and profits provide an incentive
• those on the left argue those on low incomes need to be supported

Question 9

how can the govt reduce poverty and inequality?

Answer 9

use a progressive tax system
use govt expenditure in the form on benefits and transfer payments
provide goods and services
attempt to reduce wage differentials
improvements in access to education and training opportunities
introduce price controls on essential goods
law of diminishing marginal utility

Question 10

how can a the use of progressive tax system be used to reduce poverty + inequality be evaluated?

Answer 10

• richer people will pay more in tax
• however tax is difficult to enforce as they are avoidable by carful tax planning
• there are some unintended consequences for raising tax e.g reduction in incentives and the impact of the laffer curve

Question 11

how can govt expenditure be used to reduce poverty + inequality

Answer 11

Spending on transfer payments and benefits
targeted at people who need the most help and
provide a minimum standard of living are better at improving inequality since they directly affect the poor

Question 12

what are universal benefits

Answer 12

universal benefits are available to everyone who meet a certain criteria, respective of income

Question 13

what are means tested benefits?

Answer 13

means tested benefits only available to people who have sufficiently low levels of income/ wealth

Question 14

how can the use of benefits to reduce poverty be evaluated?

Answer 14

some argue that benefits reduce peoples incentive to work, especially if they can earn a similar amount on benefits to what they could in work

Question 15

how can the govt use provision of goods to reduce poverty + evaluation?

Answer 15

• they govt an also provide goods and services which give citizens equal opportunities and access to services they may not otherwise be able to afford e.g healthcare
  
  • helps to ensure that everyone is given an equal start in life
  • however they also benefit those on higher incomes and theres an opportunity cost for this

Question 16

In what ways can the govt reduce wage differentials to reduce poverty?

Answer 16

national minimum wage → will improve the incomes of the poor
maximum wage will reduce the incomes of the rich and could mean that companies increase the pay of their lowest income workers
equal pay legislation
trade union friendly legislation
employers could be forced to provide benefits to their workers e.g sickness benefits, medical care

Question 17

how can the use of minimum wages to reduce poverty be evaluated?

Answer 17

however, minimum wages may cause unemployment and maximum wages may lead to a loss of the most skilled workers

Question 18

what is equal pay legislation?

Answer 18

prevent inequality between men and women or between ethnic groups

Question 19

what is trade union friendly legislation?

Answer 19

allow wages of their workers to rise and those in unions are more likely to be the low paid so this will positively affect equality

Question 20

how can improvements in access to education and training be used to reduce poverty?

Answer 20

• prevent children from poorer backgrounds achieving less than others which would reduce their earning potential
• govt has attempted to address this by offering additional funding through pupil premium scheme and easier access to uni

Question 21

how can the introduction of price controls reduce poverty?

Answer 21

• this will increase the spending power of the poor
  
  • however this could cause excess supply
  • may lead to development of black markets

Question 22

what is the trickle down argument?

Answer 22

free market economists use the argument of trickle down which argues that increasing the incomes of the rich will lead to an inc in the income of the poor
- the rich create jobs by spending money and employing others
- reducing their incomes would reduce employment and lead to lower living standards
- they also believe inequality is necessary to encourage people to work hard and therefore increase their income

Question 23

how can the law of diminishing marginal utility be used to reduce poverty?

Answer 23

• suggests that redistribution increases total utility and therefore is a better allocation of resources
• the higher the spending on an individual, the less satisfaction they gain from spending an extra pound

Question 24

how can changes in interest rates and monetary supply be used to manage the economy

Answer 24

• the central bank has the ability to change interest rates and monetary supply
  
  • they may do this to for e.g control inflation, low exchange rate, changes in world commodity pries
  • a fall in the bank rate is likely its increase the supply of money as it means there is more demand for loans

Question 25

how can you evaluate the use of monetary supply and interest rates to manage the economy?

Answer 25

• however there is no simple relationship between supply of money and inflation
  
  • it can be argued that central banks dont have complete control over money supply as they cant control the ability of the financial system to create credit
  • the globalisation of the financial market has also made it harder to control domestic money supply

Question 26

how can improving international competitiveness be used to manage the economy?

Answer 26

govt can improve competitiveness through:
exchange rate policies
supply side measures
they can join the WTO or sign trade agreements

This can:
Improve CA deficit
Create jobs in export sector
Increase AD

Question 27

how can supply side measures be used to improve competition

Answer 27

• will improve productivity and flexibility and can involve taxes and deregulation
  
  • they can encourage competition → force firms to be efficient and therefore competitive within the global market
  • they can place emphasis on quality of products and use tax incentives to encourage incentives
  • education will improve the skills of the workforce and help improve flexibility

Question 28

how can exchange rate policies be used to improve international competitiveness

Answer 28

may control inflation and macroeconomic stability
e.g china devalues their currency to reduce export prices

Question 29

how can external shocks be used in a global context

Answer 29

• due to globalisation, the world economies are increasingly interdependent
• macroeconomic policies such as expansionary fiscal policy can be used to combat the effects of negative shocks such as financial crisis’s or commodity price shocks to the economy

Question 30

how can the govt combat commodity price shocks

Answer 30

• govt can use expansionary policy to reduce the impact of a fall in GDP
• or they can use deflationary policy to reduce the impact on inflation

Question 31

how can the govt combat a financial crisis

Answer 31

the govt can use expansionary fiscal policy to increase AD

Question 32

what could changes in exchange rates cause

Answer 32

changes in exchange rates can cause inflation within the country or could cause a fall in growth and a poor balance of payments

Question 33

how can TNCs benefit an economy

Answer 33

by creating jobs, the tax revenue they raise, the knowledge they bring and their investments

Question 34

what is the evaluations of the benefits TNCs could bring to an economy

Answer 34

• they may destroy local culture
  affect the environment
  withdraw more in profits than they inject through investment
  they also have a history of influencing politicians to take decisions that will favour their interests
  are involved in tax avoidance

Question 35

why dont some countries allow TNCs to set up in their country?

Answer 35

• some countries dont allow TNCs to set up in their country without first setting up a joint company with a local partner
  
  • this means that some of their profits are retained within the country
  • also means knowledge and technology is transferred
• many countries use import contracts with TNCs meaning that at least some part of the value of the order must be manufactured in the country

Question 36

what is transfer pricing?

Answer 36

• transfer pricing is one way for firms to engage in tax avoidance
• this can occur if a firm produces a good in one country and then transfers it to another country to make it into another good which it then sells
• if taxes are higher in the first country than the second, they can set a low price on the product made in the first country
• shifts profits out of the countries where they operate and into countries where they have minimal tax liability for their profits
  
  • overall reduces their tax bill

Question 37

why is it difficult for individual companies to control TNCs?

Answer 37

• small countries may earn less in revenue than TNCs earns in profits
  
  • highly educated executives are able to use a number of resources to find a solution which will benefit them

Question 38

why are solutions to taxation difficult?

Answer 38

• govt needs to raise revenue to fund spending
• there is also division between countries
  
  • this division allows TNCs to prevent any agreement they dont like through immense lobbying
• any solutions are also time consuming and costly

Question 39

recall the problems facing policy makers?

Answer 39

inaccurate info
risks and uncertainties
external shocks

Question 40

how does inaccurate info cause problems for policy makers?

Answer 40

• short term info such as GDP figures for the previous months are often inaccurate
  
  • this may mean that the gov is unable to see if there are problems within the economy
• trying to cut down on tax evasion and avoidance is difficult a the govt doesnt have the full picture on the level of tax avoidance, who it is thats avoiding the tax and the best way to reduce it
• the BoE makes its decisions based on past data but its possible trends in the economy may be changing
  
  • so past data gives an inaccurate picture of where the economy is currently heading
  • with interest rates so low for such a long time, past data is unlikely to give an accurate representation of current economic climate which makes it difficult for the bank to know which action to take

Question 41

how do risks and uncertainties cause problems for policy makers?

Answer 41

• the govt cant accurately predict the future so its difficult for them to know whether extra spending is necessary
• they cant know the full impact of their decisions as consumers react unexpectedly
  
  • this could undermine govt policy
• managing risk is an essential part of decision making

Question 42

how do external shocks cause problems for policy makers

Answer 42

• the govt is unable to control and prepare for these eternal shocks → hope to lessen their impact instead
• every situation is different so it may be difficult to know the best method to solve the problem
• policies employed by policy makers may not have their intended impacts
  
  • may also undermine current policies