Macroeconomic Policies In A Global Context

Question 1

Measures to reduce fiscal deficits

Evaluation (3)

Answer 1

A combination of higher tax rates and lower government spending

1. Effects growth negatively
2. Reducing deficits also reduces tax revenue
3. Competitiveness can increase

Question 2

Impact of lower interest rates (4)

Answer 2

In 2008 most countries dropped this

1. Reduce cost of borrowing and encourages spending
2. Reduces the cost of mortgage payments enabling more disposable income
3. Reduce incentive to save
4. Leads to higher economic growth

Question 3

Evaluation to interest rates boosting the economy (5)

Answer 3

1. Banks didn’t have money to lend
2. Confidence was very low
3. Time lags - 18 months
4. Fiscal policy was tight
5. Cost push inflation from oil prices

Question 4

Evaluation of Quantitive easing in the Uk (3)

Answer 4

1. Without QE, the recession may have been deeper because of deflationary pressures
2. Government bond yields fell making it cheaper for the government.
3. Some say QE leads to future inflation because of excess money

Question 5

Measures to increase international competitiveness and how? (2)

Answer 5

1. Devaluation - increase costs of imports and inflation to help current account deficit
2. Internal devaluation - countries in EU couldn’t devalue currency because of Euro instead they:
   . Supply side reforms
   . Tight fiscal policy

Question 6

Problems with internal devaluation (3)

Answer 6

1. Resistance to wage cuts
2. Deflation can be a severe cost to the economy as people don’t spend
3. Takes a long time to improve competitiveness through deflationary fiscal policy

Question 7

Regulations used for transnational companies (4)

Answer 7

1. Environmental laws
2. Monopoly power
3. Treatment of workers
4. Transfer pricing

Question 8

Difficulties in regulating transnational firms (3)

Answer 8

1. Difficult to agree on environmental laws
2. Countries have different aspects of tax regimes
3. Poor information- may not know how much regulation is needed

Question 9

Th difficulties in macroeconomic policy making (3)

Answer 9

1. Inability to control external shocks
2. Inaccurate information/ forecasting of the economy
3. Risks and uncertainties