Theme 2:2.6 Macroeconomic objectives and policies

Question 1

7 government objectives

Answer 1

-economic growth
-low and stable inflation rate
-low unemployment
- balance of payments equilibrium on current account
-balanced government budget
- protection of the environment
- greater income equality

Question 2

what is fiscal policy?

Answer 2

fiscal is the changes to gov spending an taxation in order to influence AD

Question 3

what is monetary policy?

Answer 3

monetary policy is the use of interest rates and money supply by the central bank to influence AD.

Question 4

what is expansionary monetary policy and why is it used?

Answer 4

factors in order to increases AD:
-increase inflation
-increase growth
-reduce unemployment

Question 5

what is contractionary monetary policy and why is it used?

Answer 5

factors in order to decrease AD:
-decrease inflation
-prevent asset
-reduce excess debt
-reduce current account deficit

Question 6

what is expansionary fiscal policy and why is it used?

Answer 6

factors in order to increase AD:
-boost growth
-reduce unemployment
-increase inflation
-redistribute income

Question 7

what is contractionary fiscal policy and why is it used?

Answer 7

factors in order to decrease AD:
-reduce inflation
-reduce current account deficit
-redistribute income
-reduce budget defit

Question 8

diagram for expansionary monetray policy

Question 9

diagram for expansionary fiscal policy with multiplier effect

Question 10

effect of expansionary monetary policy

Answer 10

-cheaper borrowing-less saving-more consumption

-increases disposable income-less interest spent on mortgages

Question 11

examples of expansionary fiscal policy.

Answer 11

-reduce income tax
-reduce corporation tax
-increases gov spending

Question 12

possible side effect of expansionary fiscal policy

Answer 12

can affect LRAS as reduced income tax increases labour supply for example.

Gov spending on education can boost productivity

LRAS will shift to the right

Question 13

quantitative easing?

Answer 13

buying assests in exchnage for money

Question 14

when does quantitative easing occur ?

Answer 14

when interest rates are too low and a further reduction will not have an affect in AD

Question 15

steps in quantitative easing.

Answer 15

-central bank creates money electronically
-central bank uses money to buy financial assets from financial institutions e.g. gov bonds from a bank
-financial institutions have excess money and can lend it out with low interest rates
-more credit available for consumers

Question 16

problems with monetray policy

Answer 16

-can cause balance of trade deficit if exchange rates decrease and pound depreciates

-interest rates so low they can’t be reduced

-not all interest rates affect by BoE base rate

–high interest rate reduce investment

Question 17

problems with QE

Answer 17

-can cause high inflation or hyperinflation

-caused rapid price increases in the housing market

Question 18

government budget fiscal deficit vs surplus

Answer 18

deficit is when money spent by gov is greater than what was received
surplus is when spent is less than what was received

Question 19

direct tax

Answer 19

taxes paid directly to the government by the tax payer.

Question 20

indirect tax

Answer 20

taxes on the consumption of a good which has been imposed on the seller.

Question 21

25%

Answer 21

the amount of indirect tax which makes up the gov tax revenue in the UK.

Question 22

20%

Answer 22

the standard rate of VAT in the UK

Question 23

45%

Answer 23

the additional rate of income tax for incomes over £150,000 in the UK

Question 24

problems with fiscal policy.

Answer 24

• high taxes reduces incentives to work and whilst working

-impact of fiscal policy depends on the mutiplier

-taxes can impact inequality

Question 25

BoE role MPC

Answer 25

monetary policy committee control the monetary policy and oversee important decisions e.g. what to set base rate

Question 26

Aim of the MPC

Answer 26

to keep inflation at 2%

Question 27

if inflation is less than 1% or more than 3%?

Answer 27

the BoE have to write a letter to the chancellor of the Exchequer and explain why it happened and what they’re doing to get it to the target rate

Question 28

cause of the Great depression

Answer 28

loss of conumer and business cofidence: shareholders lost moeny in the crash and that would reduce investment in the economy and then reduce AD

Question 29

US response to the great depression

Answer 29

Franklin Roosevelt was elected in 1932 with his New Deal which promised
public sector investment, work schemes for the unemployed and fiscal stimulus.

Question 30

unemployment rates in UK and US due to Great depression

Answer 30

UK-15%
US-25%

Question 31

UK response to Great depression

Answer 31

introduced an emergency budget which cut public sector wages and
unemployment benefit by 10% and raised income tax from 22.5% to 25%. This reduced AD at a time when it needed to be increased.
and to balance government budget

Question 32

cause of the 2008/9 financial crisis

Answer 32

lack of regulation:loans were given to people with poor credit and also the sales of risky mortgages

Question 33

US and UK response to 2008/9 crisis

Answer 33

forced to nationalise banks and building societies and guarantee savers their money in order to avoid chaos and a collapse of the banking system.

-expansionary monetary policies e.g. QE and lowered interest rates.