Quick Points (Macro)

Question 1

Fiscal Policy (Expansionary) - 4

Answer 1

1. Boost growth
2. Reduce unemployment
3. increase demand-pull inflation
4. Redistributes income

Question 2

Fiscal Policy (Contractionary) - 4

Answer 2

1. Reduce inflation
2. Reduce budget deficit
3. Reduce CA deficit
4. Redistribute income

Question 3

Policies to reduce demand-pull inflation - 2

Answer 3

1. Contractionary Monetary Policy:
- Via increase in interest rates
- More suited as the transmission mechanism helps reduce inflation
2. Contractionary Fiscal Policy
- Via cutting gov spending or increasing taxation
- unlikely to be used since it is the central banks job to target inflation

Question 4

Evaluation of reducing demand-pull inflation - 4

Answer 4

1. Conflict of macro objects (trade-offs (costs, economic growth falls, unemployment rises))
2. Impact on investment (interest rates rise, investment falls, cost of borrowing increases)
3. Impact on indebted (households & businesses in debt due to rise in interest rates)
4. Stronger exchange rates (widens CA deficit, hot money inflows)

Question 5

Policies to reduce cost-push inflation - 3

Answer 5

1. Implement/reduce inflation target (fall in wages in economy, limits wage inflation)
2. Reduce VAT/Subsidies to a firm (significant cost to gov & decreases gov finances unlikely)
3. Intervene in FOREX mkt to strengthen exchange rate (stronger exchange rate = cheaper imports = lower costs of production unlikely)

Question 6

What would you use expansionary monetary policy for? - 3

Answer 6

1. increase inflation (central bank mandate if inflation is lower than target)
2. increase growth (from increase in AD)
3. reduce unemployment (from increase in AD)

Question 7

What would you use contractionary monetary policy for? - 4

Answer 7

1. reduce inflation (central bank mandate if inflation is higher than target)
2. prevent asset/credit bubbles
3. reduce excess debt & promote savings (balance economic growth)
4. reduce CA deficit

Question 8

Pros of contractionary monetary policy (via a rise in interest rates) - 6

Answer 8

1. fall in inflation (demand-pull)
2. discourages household/corporate debt
3. more sustainable borrowing/lending
4. encourage savings
5. rise in affordable housing
6. reduces CA deficit

Question 9

cons of contractionary monetary policy (via a rise in interest rates) - 5

Answer 9

1. lower growth
2. increased unemployment
3. impact on the indebted
4. fall in investment
5. worsening CA deficit via exchange rate strengthening

Question 10

Cons of expansionary monetary policy (via a fall in interest rates) - 5

Answer 10

1. demand-pull inflation
2. widens CA deficit
3. liquidity trap
4. negative impact on savers
5. time lags

Question 11

Summary of QE

Answer 11

Central bank creates money to buy bonds from financial institutions which reduces interest rates leading to businesses & people borrowing more so they spend more and create jobs to boost the economy

Question 12

Complete QE Process - 7

Answer 12

1. Central bank creates money electronically
2. That money is used to buy financial assets (gov bonds) from financial institutions (banks, building societies, hedge funds etc) which disincentivises people to buy gov bonds
3. Prices rise for gov bonds & yield (interest rates) fall [interest rates on bonds represents return for investore but cost of borrowing for issuer (lowers incentive to hold gov bonds)]
4. Financial institutions either loan money out (good - intention of QE) or invest in riskier corporate bonds/shares (more likely - corporate firms are more likely to default = riskier)
5. Price rises for gov bonds & yield (interest rates) fall (demand for bonds increase) [for banks issuing corporate bonds, if yield is low, accessing finance is cheaper = rise in finance @ lower cost]
6. Access to credit improves, general interest rates fall (cheaper to raise finance), willingness to lend (individuals & firms) increases at a lower interest rate = market rate falls to match base rates
7. stimulates borrowing, spending & investment = rise in AD & growth, fall in unemployment, recovery

Question 13

Disequilibrium Unemployment - 2

Answer 13

1. Cyclical (demand-deficient)
   - unemployment that occurs in a recession (lack of AD in economy)
2. Real Wage Unemployment (classical)
   - wages are forced above equilibrium in a labour market (excess supply of labour)

Question 14

Equilbrium Unemployment (NRU) - 3

Answer 14

1. Structural
   - Immobility of labour due to long term changes in structure of an economy
   - Occuapational & Geographical
2. Frictional
   - Workers are inbetween jobs, looking for a new/better job
3. Seasonal
   - Temporary fall in demand for workers (due to seasonal change)

Question 15

Causes of growth (actual) SR - 5

Answer 15

A rise in AD - using spare capacity to increase real GDP
1. fall in interest rates (C,I, X-M)
2. fall in income/corporation tax (C,I)
3. rise in business/consumer confidence (C,I)
4. rise in gov spending (G)
5. weaker exchange rate (X-M)

Question 16

Causes of growth (potential) LR - 6

Answer 16

A rise in LRAS - rise in the productive capacity of an economy
1. rise in labour productivity (B)
2. rise in workforce size (immigration) (A)
3. investment (A,B,C)
4. infrastructure improvements (A,C)
5. rise in competition (C)
6. new resource discoveries (A)

LRAS rises due to:
A. rise in quantity of FOP’s
B. rise in quality of FOP’s
C. rise in productive efficiency

Question 17

Exchange Rate (Appreciation) - 5

Answer 17

SPICED
1. rise in relative IR
2. speculators/traders anticipate rise in £
3. rise in FDI
4. rise in incomes abroad
5. rise in competitiveness

Question 18

Exchange Rate (Depreciation) - 4

Answer 18

WIDEC
1. fall in relative IR
2. speculators/traders anticipate fall in £
3. firms moving away from UK
4. rise in domestic incomes