Macroeconomic policy and Objectives

Question 1

What is Macroeconomics?

Answer 1

Studies the behavior of the economy as a whole

Question 2

What are the Key objectives of macroeconomic policy ?

Answer 2

• Price stability (inflation of 2%)
• growth of real GDP/ national output
• Rising employment
• higher average living standards
• Stable BoP
• Equitable distribution of wealth
• Balancing the fiscal budget
• Better regional balance of wealth
• Improved public services access
• improved competitiveness
• Environmental sustainability

Question 3

What are bond yields?

Answer 3

The rate of interest pain on government debt

Question 4

What is a cyclical fiscal deficit?

Answer 4

When a government is running a deficit due to being at different places in the trade cycle (boom/recession)

Question 5

What is Fiscal policy?

Answer 5

Government policies that involve spending and taxation measures to help guide the economy

Question 6

What is indirect taxation?

Answer 6

The levying of tax on goods and services rather then on wealth and profits e.g. VAT

Question 7

What is the National debt?

Answer 7

The amount of money owed by the government which has accumulated over time.

Question 8

What is a structural fiscal deficit?

Answer 8

The part of a deficit which is not related to the economy, it will not disappear even once the economy recovers

Question 9

What is Government spending?

Answer 9

Spending by the public sector on goods and services, like education, healthcare and defense.

Question 10

What is the public sector??

Answer 10

Businesses that are owned and operated by the government. there are 5.7 million (18.8% of employment) working in the public sector, 1.5 million in the NHS alone

Question 11

What is Capital spending?

Answer 11

Spending on providing public services:

• Salaries of NHS workers
• Healthcare drugs
• Road maintenance
• Army logistical supplies

Question 12

What is capital spending?

Answer 12

Spending on new public infrastructure:

• New motorways
• New NHS equipment
• Flood defence schemes
• Additional defence spending

Question 13

What economic benefits does investing in Education bring?

Answer 13

May increase the productivity of workers
improvement in human capital and reduces structural unemployment
More innovation and competitiveness

Question 14

What are the potential negatives of investing in education?

Answer 14

Effectiveness of education spending has been questioned
Money might be better spent on targeting other age groups or demographics opportunity costs
May be a lag

Question 15

What are the benefits of additional healthcare spending ?

Answer 15

Improved health will boost the active labour force
Will increase productivity
Lessens risk of relative poverty

Question 15

What are the drawbacks of additional healthcare spending ?

Answer 15

Better health results can be achieved with other policies that don’t involve increased spending
Lower income families may not get the improved access to improved facilities/ technologies.

Question 16

What is progressive tax?

Answer 16

When the Marginal rate of tax rises as incomes also rise

Question 17

What is a proportional tax?

Answer 17

When the tax rate is equal, no matter the income e.g. national insurance contributions

Question 18

What is a regressive tax?

Answer 18

When the rate of marginal tax falls as incomes rise e.g. Excise duties on tobacco and alcohol

Question 19

What is expansionary fiscal policy?

Answer 19

Fiscal policy targeted at reaching growth

Question 20

What are some examples of expansionary fiscal policy?

Answer 20

• Cut in Income tax
• Cut in VAT
• Cut in corporation tax
• Cut in tax on interest from saving

Question 21

What are the effects of a lower corporation tax?

Answer 21

Businesses get to keep a larger portion of their porfitst
the increase in post tax profits could lead to an increase in planned investment
this investment can be from both domestic and foreign businesses
Increased capital spending is an injection into the circular flow
creates a multiplier effect on demand, output and employment

Question 22

What are some evaluative points on the effect of reducing corporation tax?

Answer 22

Effects depends on scale of tax cut
many factors affect capital investment
There will be a lag time between when tax is lowered and when investments begin
Extra investment may lead to a loss of jobs through capital assets, the Labour substitution effect occurs

Question 23

What are the benefits of a high taxation economy?

Answer 23

Taxation helps balance the distribution of welath and income, it can be equitably be distributed by the government
Tax cuts don’t necessarily increase income for the government
Many countries with high taxation rates like Scandinavia are very economically successful
Taxes are needed to fund high quality public services and products

Question 24

What are the justifications for government borrowing?

Answer 24

A rise in borrowing to increase G can powerfully affect AD a higher fiscal deficit is often needed to lift AD out of a recession this can in turn then reduce the fiscal deficit, depending on the multiplier interest rates are often low on government loans

Question 25

What are the main drawbacks for public debt (more borrowing)?

Answer 25

High deficits cause interest payments to rise The paying of interest rates has a burden on opportunity costs An increase in national debt will likely create higher taxes in the future The rising burdens may fall on future generations

Question 26

What is Monetary policy?

Answer 26

Any policy related to interest rates, the money supply, exchange rate, it is led by the central bank

Question 27

What are supply side policies?

Answer 27

Any policy intending to increase the productive potential output of a economy (Shift LRAS outwards) by increasing the quantity or quality of the factors of production

Question 28

What are interventionist policies?

Answer 28

Economic interventionism, sometimes also called state interventionism, is an economic policy position favouring government intervention in the market process to correct market failures and promote the general welfare of the people.

Question 29

What are free market economic policies?

Answer 29

A policy where buyers and sellers privately transact their business without any obstructed competition.

Question 30

What are some examples of free market supply side policies?

Answer 30

Reduce income tax (incentivise longer hours and economic activity) Reduce corporation tax Deregulate industries to lower entry barriers Reduce planning restrictions and land usage

Question 31

What are some examples of interventionist supply side policies?

Answer 31

Increase government spending on training schemes Increase government spending on transport infrastructure Provide subsides to key sectors Provide grants to fertilisers

Question 32

How long does it usually take for interest rates to affect inflation?

Answer 32

About 18 months

Question 33

What is the transmission mechanism for how interest rates can change AD (referring to hot money)?

Answer 33

``` Interest rates rise Hot money flows into the UK Demand for the £ increases Exchange rate goes up More imports less exports(SPICED) BoP deteriorates AD falls because (X-M) ```

Question 34

What are the strengths of demand side policies?

Answer 34

If the Multiplier effect is large it can create significant growth If there is spare capacity within an economy, the economy can grow quickly It can be used quickly to control demand pull inflation Can get a country out of demand deficient unemployment

Question 35

What are the weaknesses of demand side policies?

Answer 35

Can create demand pull inflation If the multiplier is low there will be little effect If there is no spare capacity, it means that supply side policies need to be introduced Can lead to a large government deficit and is often unsustainable

Question 36

What are the five main macroeconomic conflicts?

Answer 36

``` Inflation and Unemployment Low inflation and growth Growth Vs Environment (try to avoid) Growth and BoP Growth and inequality ```

Question 37

How is inflation and unemployment a conflict?

Answer 37

Gov investment creates more jobs which increases AD as it gives consumers greater disposable income as a result spending increases and demand pull inflation occurs (as a result increased employment means increased inflation)

Question 38

What is the Relationship between Inflation and Unemployment rate?

Answer 38

There is an inverse relation - as unemployment increases inflation decreases

Question 39

What model shows the conflict between inflation and unemployment?

Answer 39

The Philips curve.

Question 40

why is the Philips curve potentially not accurate?

Answer 40

It was created in 1958, and as a result is likely outdated and doesn't represent todays more complex economy.

Question 41

What is the Conflict between low inflation and growth?

Answer 41

If there is rapid economic growth, it is more likely that inflationary pressures will increase. Inflation is particularly likely to occur when growth is above the long run trend rate, and AD increases faster than AS. When the economy is growing very quickly, firms have difficulty employing sufficient skilled labour; this can lead to wage inflation and higher wages cause higher prices. Also, if demand grows faster than supply, firms will respond to shortages by putting up prices.

Question 42

What is the conflict between growth and the environment?

Answer 42

there can be a strong conflict between economic growth and environmental objectives. Higher GDP leads to higher levels of pollution and consumption of non-renewable resources. However, it is possible to have economic growth without harming the environment. For example, the development of solar panels has helped increase energy productivity, but it is also better for the environment than burning coal.

Question 43

What is the conflict between growth and BoP?

Answer 43

As economic growth occurs, UK residents benefit from higher real incomes and because the UK has a high MPM, as incomes rise, imports also rise, worsening the BoP.

Question 44

What is the UK's Marginal propensity to import?

Answer 44

0.62, 62p of every pound is spent on imports

Question 45

What is the economic conflict between growth and inequality?

Answer 45

As the economy grows, incomes usually rise among the top income earners, this increases income inequality However some think as the rich get richer, more revenue is gained by the government that may allow for higher transfer payments to low income households (trickle down economics)

Question 46

What were the main policy responses to the Great recession?

Answer 46

- Governments bailed out many banks, after the US Lehman's brothers incident, the UK bailed out Northern rock, Lloyd TSB and many others to avoid a major loss of consumer confidence - Cuts in interest rates to encourage spending and investment - Expansionary fiscal policy, VAT cut from 17.5% to 15%

Question 47

What were the Key differences between the GFC and the Great Depression policy responses?

Answer 47

- Banks were (Mostly) bailed out in the GFC and didn't go bust - There was no major trade war in 2008 (in 1930s, a trade war developed as countries tried to protect domestic industries.

Question 48

Why did the UK have the slowest recovery on record following the GFC?

Answer 48

- Balance sheet reccession, both COnsumers, firms and banks were in debt - Shortage of credit, there was hardly any investment - Rise in EU bond yield (interest on government debt) - Productivity crisis because low wage growth and limited investment