Theme 2, 2.6 Introduction to Macroeconomic Policy

Question 1

Define Economic Growth

Answer 1

The increase in the real value of goods and services produced as measured by the annual percentage change in real Gross Domestic Product (GDP). Economic growth is also defined as a long-run increase in a country’s productive capacity / potential national output. Economic growth means we can consume more.

Question 2

Define Low unemployment

Answer 2

A small number of households unemployed.

Question 3

Define Low and Stable rates of inflation

Answer 3

Bank of England target is 2%

Question 4

Define Balance of payments equilibrium non current account.

Answer 4

Describes a situation which current outflows are exactly equal to current inflows. So visible and invisible exports, plus investment income paid abroad and current transfers abroad, would together be equal in value to visible and invisible imports, investment income coming from abroad and current transfers coming from abroad. ( The balance of payments as a whole includes capital flows as well as current flows.

Question 5

Define Disposable Income

Answer 5

Is personal income after tax- the amount available for household spending.

Question 6

Define Net injection

Answer 6

Means a positive amount by which total injections exceed total leakages ( with-drawals). Similarly a net leakage means the amount by which leakages exceed injections.

Question 7

Define An Expansionary Policy

Answer 7

Is one that uses fiscal measure to increase spending within the economy, to encourage economic growth.

Question 8

Define A Contradictory Policy

Answer 8

Aims to reduce spending in the economy in order to avoid overheating high interest rates.

Question 9

Define Direct Taxation

Answer 9

Is paid directly by individuals and firms from their income or profit.

Question 10

Define Indirect taxes

Answer 10

Are taxes on goods and services, generally collected from a retailer or other intermediary. e.g. VAT

Question 11

Define National Debt

Answer 11

Is the cumulative total of public sector debt outstanding.

Question 12

Define Austerity

Answer 12

Policies involve spending cuts and tax increases, which reduce the extent to which the government needs to borrow. They are contradictory, meaning that they will tend to reduce economic activity generally.

Question 13

Define Base Rate

Answer 13

The bank rate, commonly known as base rate, is set by the MPS, being its main tool for controlling the level of lending in the economy.

Question 14

Define Monetary Policy Committee (MPC)

Answer 14

The Bank of England group meets monthly to set the base rate. Their main target is 2% CPI inflation but they also consider other economic objectives.

Question 15

Define Progressive Tax

Answer 15

A tax that hits the better off harder than the less well off.

Question 16

Define Regressive Tax

Answer 16

A tax that hits the less well of than the better well off.

Question 17

Define Capital Spending.

Answer 17

Government spending on investment, perhaps in infrastructure such as roads.

Question 18

Define Deregulation

Answer 18

Reducing rules and regulations which inhibit private enterprise.

Question 19

Define Privatisation

Answer 19

Selling public sector bodies to private sector shareholders.

Question 20

Define Interventionist

Answer 20

Policies that are associated with measures to reduce market failure and in particular with policies that address income inequality.

Question 21

Define Free Market Policies.

Answer 21

Are associated with ‘smaller government’, minimal government intervention, incentives to work and allowing markets to function freely.

Question 22

Define Sustainable Growth

Answer 22

It may relate to economic growth that is growing unsustainably fast. It cannot continue indefinitely because there will be insufficient resources to maintain the momentum. Skill shortages will develop and inflation will accelerate. Alternatively, it may relate to environmental problems, with excessive use of resources that are finite, i.e. cannot be replaced once they have been used.

Question 23

Define Austerity

Answer 23

In order to reduce government debt and borrowing. Government spending reduces and government taxes increase.

Question 24

What are the 4 main macroeconomic objectives?

Answer 24

1. Economic growth
   2.Low unemployment
   3.Low inflation
   4.Balance of payments equilibrium

Question 25

What rate of unemployment does the government aim for?

Answer 25

3%

Question 26

What is a budget deficit?

Answer 26

This occurs when expenditures exceed tax revenue

Question 27

Describes the difference between government deficit and the budget deficit

Answer 27

Government debt is an accumulation of budget deficits

Question 28

what is discretionary fiscal policy?

Answer 28

When the government increases their spending and taxation

Question 29

What do governments spend the most money on?

Answer 29

Pensions and welfare payments

Question 30

What is the biggest source of tax revenue?

Answer 30

Income tax

Question 31

What type of fiscal policies does the government implement when inflation is high?

Answer 31

Deflationary fiscal policies

Question 32

Give 2 features of expansionary fiscal policy

Answer 32

Increase in expenditures and reduction in taxes

Question 33

Describe crowding out

Answer 33

Occurs when an increase in government spending reduces the resources available for the private sector to use.

Question 34

Will fiscal policies have an immediate impact on the economy?

Answer 34

No, there is a time lag

Question 35

What 3 things does monetary policy involve?

Answer 35

1. Interest rates
   2.Monet supply
   3.Exchange rates

Question 36

Briefly describe how quantitative easing works

Answer 36

The central bank digitally creates new money, which it then uses to buy corporate and bank bonds, so that banks are more willing to loan money to consumers to stimulate more demand in the economy.

Question 37

How often do the Monetary Policy Committee (MPC) meet?

Answer 37

8 times a year

Question 38

What is the base rate?

Answer 38

The interest rate set by a central bank to loan money to commercial banks.

Question 39

Do low interest rates encourage saving or borrowing?

Answer 39

Low interest rates encourage borrowing

Question 40

What is the positive wealth effect?

Answer 40

This occurs when people spend more because they feel richer

Question 41

Why might changing the base rate have no effect on the economy?

Answer 41

Banks may not choose to pass this base rate onto consumers in the form of higher interest rates.

Question 42

What is the aim of supply side policies?

Answer 42

To improve the long-run productive potential of the economy.

Question 43

How are training and education beneficial to firms?

Answer 43

They improve the productivity of the workforce

Question 44

Give one benefit of privatisation

Answer 44

Firms now have a profit-motive, and so will find ways to cut costs and improve productivity, which in turn increases output.

Question 45

Are supply-side policies better at reducing structural or cyclical unemployment?

Answer 45

Structural unemployment

Question 46

How will an increase in interest rates affect exchange rates?

Answer 46

It attracts more hot money, thus appreciating the currency against one with a lower interest rate

Question 47

What is the Marshall-Lerner condition?

Answer 47

This states that a devaluation in a currency only leads to an improvement in the balance of payments if the sum of export and import elasticities is equal to or greater than 1.

Question 48

What is likely to happen to aggregate demand given an exchange rate appreciation?

Answer 48

Exports become expensive, so AD is most likely to fall

Question 49

When does the Philips curve show?

Answer 49

The inverse relationship between inflation rates and the rate of unemployment

Question 50

Explain why inflation rises as unemployment falls?

Answer 50

As the economy grows, workers have more bargaining power as firms need more of them, so workers demand higher wages which increase the prices of goods and thus the overall inflation rate.

Question 51

What is a positive output gap?

Answer 51

Occurs when the actual level of output exceeds the potential level of output

Question 52

Why does economic growth lead to a current account deficit?

Answer 52

British consumers have a high prosperity to import, which eventually exceeds the level of exports during times of economic prosperity.

Question 53

What is a command economy?

Answer 53

This is when the government allocates all scarce resources in an economy.

Question 54

What is a mixed economy?

Answer 54

Combines all features of both a command economy and free market economy.