Macroeconomic policy objectives

Question 1

Name seven macroeconomic policy objectives.

Answer 1

• 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

Question 2

What measure is likely to be used to monitor economic growth?

Answer 2

change in real GDP

Question 3

Why is economic growth the most fundamental macroeconomic policy objective?

Answer 3

because it should (in theory) lead to improved wellbeing of all

Question 4

Define cost-push inflation.

Answer 4

inflation initiated by an increase in costs faced by firms

Question 5

Define demand-pull inflation.

Answer 5

inflation initiated by an increase in aggregate demand

Question 6

Define money supply.

Answer 6

the quantity of money in the economy

Question 7

If money supply grows quicker than real output, what will be the result?

Answer 7

persistent inflation

Question 8

What conditions are needed for persistent inflation?

Answer 8

money supply growing faster than real output

Question 9

How does growth in money supply lead to inflation?

Answer 9

FIrms and households will have excess cash so will increase spending, so AD curve shifts right, leading to higher equilibrium prices

Question 10

How does inflation lead to more inflation?

Answer 10

Firms and households anticipate more inflation to speed up their spending, shifting AD curve to right so more inflation.

Question 11

Explain the menu costs of inflation.

Answer 11

Firms have to keep amending their price lists (such as menus), increasing costs of eg printing, labour costs.

Question 12

Explain the shoe-leather costs of inflation.

Answer 12

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.

Question 13

Why does high inflation lead to ineffective markets?

Answer 13

High inflation leads to worth of money reducing and at the extreme of hyperinflation, economy may return to bartering rather than using money.

Question 14

Why does inflation lead to uncertainty?

Answer 14

Inflation makes it harder to predict future prices so reluctance by firms to invest so preventing expansion of economy.

Question 15

Why might inflation lead to wasted resources and lost business opportunities?

Answer 15

It reduces ability of prices to be reliable signals when allocating resources.

Question 16

What is the current UK inflation target?

Answer 16

2% pa growth in CPI

Question 17

Why do inflation measures tend to overstate real inflation?

Answer 17

Impossible to distinguish accurately between a price change and quality change (eg higher price for new iPhone but partly due to better quality?)

Question 18

Consider the market for pounds relative to euros. Where does the demand for pounds come from?

Answer 18

residents in Eurozone wanting to buy UK goods, services and assets

Question 19

Consider the market for pounds relative to euros. Where does the supply of pounds come from?

Answer 19

UK residents wanting to buy Eurozone goods, services and assets

Question 20

If the current account of the balance of payments is in deficit, which is bigger, imports or exports?

Answer 20

imports

Question 21

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?

Answer 21

surplus

Question 22

What effect would increasing UK interest rates be likely to have on the current account of the balance of payments?

Answer 22

reduce deficit / increase surplus (as UK assets more attractive to overseas residents)

Question 23

What will the quantity of exports from UK depend on?

Answer 23

• income of rest of world
• competitiveness of UK goods and services, which in turn depends on:
• sterling exchange rate, and
• relative price levels

Question 24

What is the public sector net cash requirement (PSNCR)?

Answer 24

government spending less government revenues

Question 25

Name two events that led to significant increases in UK government debt.

Answer 25

• financial crisis (and therefore bailout of banks) in 2008/9
• Covid-19 pandemic in 2020/21

Question 26

Name two ways for the government to redistribute income from richer to poorer.

Answer 26

• progressive taxation (higher proportion of income of rich paid as tax than for poorer)
• social security benefits eg Universal Credit

Question 27

Define horizontal equity.

Answer 27

When people with identical circumstances, skills and abilities receive identical income.

Question 28

Why is inequality bad for the economy?

Answer 28

• 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.

Question 29

Why can income redistribution be bad for the economy?

Answer 29

If higher incomed are taxed more or get lower benefits, this creates disincentive to work or run a business.