Macroeconomic policy objectives Flashcards
Name seven macroeconomic policy objectives.
- increased economic growth
- reduced unemployment
- control of inflation
- restoration of equilibrium in the current account of the balance of payments
- making** income distribution **more equal
- balancing government budget
- protecting environment
What measure is likely to be used to monitor economic growth?
change in real GDP
Why is economic growth the most fundamental macroeconomic policy objective?
because it should (in theory) lead to improved wellbeing of all
Define cost-push inflation.
inflation initiated by an increase in costs faced by firms
Define demand-pull inflation.
inflation initiated by an increase in aggregate demand
Define money supply.
the quantity of money in the economy
If money supply grows quicker than real output, what will be the result?
persistent inflation
What conditions are needed for persistent inflation?
money supply growing faster than real output
How does growth in money supply lead to inflation?
FIrms and households will have excess cash so will increase spending, so AD curve shifts right, leading to higher equilibrium prices
How does inflation lead to more inflation?
Firms and households anticipate more inflation to speed up their spending, shifting AD curve to right so more inflation.
Explain the menu costs of inflation.
Firms have to keep amending their price lists (such as menus), increasing costs of eg printing, labour costs.
Explain the shoe-leather costs of inflation.
Opportunity cost of holding money higher when interest rates high (as they tend to be with high inflation) so people make frequent trips to bank (pre-internet!) to deposit money, hence wear out their shoe-leather.
Why does high inflation lead to ineffective markets?
High inflation leads to worth of money reducing and at the extreme of hyperinflation, economy may return to bartering rather than using money.
Why does inflation lead to uncertainty?
Inflation makes it harder to predict future prices so reluctance by firms to invest so preventing expansion of economy.
Why might inflation lead to wasted resources and lost business opportunities?
It reduces ability of prices to be reliable signals when allocating resources.
What is the current UK inflation target?
2% pa growth in CPI
Why do inflation measures tend to overstate real inflation?
Impossible to distinguish accurately between a price change and quality change (eg higher price for new iPhone but partly due to better quality?)
Consider the market for pounds relative to euros. Where does the demand for pounds come from?
residents in Eurozone wanting to buy UK goods, services and assets
Consider the market for pounds relative to euros. Where does the supply of pounds come from?
UK residents wanting to buy Eurozone goods, services and assets
If the current account of the balance of payments is in deficit, which is bigger, imports or exports?
imports
If the current account of the balance of payments is in deficit, what is the position of the* financial account* of the balance of payments?
surplus
What effect would increasing UK interest rates be likely to have on the current account of the balance of payments?
reduce deficit / increase surplus (as UK assets more attractive to overseas residents)
What will the quantity of exports from UK depend on?
- income of rest of world
- competitiveness of UK goods and services, which in turn depends on:
- sterling exchange rate, and
- relative price levels
What is the public sector net cash requirement (PSNCR)?
government spending less government revenues
Name two events that led to significant increases in UK government debt.
- financial crisis (and therefore bailout of banks) in 2008/9
- Covid-19 pandemic in 2020/21
Name two ways for the government to redistribute income from richer to poorer.
- progressive taxation (higher proportion of income of rich paid as tax than for poorer)
- social security benefits eg Universal Credit
Define horizontal equity.
When people with identical circumstances, skills and abilities receive identical income.
Why is inequality bad for the economy?
- Poorer less likely to meet their productive potential, eg don’t go to university or can’t get the credit needed to launch their business ideas.
- More likely to be high crime and social discontent which can disrupt economy.
Why can income redistribution be bad for the economy?
If higher incomed are taxed more or get lower benefits, this creates disincentive to work or run a business.
