Theme 2 - Macroeconomic Objective And Policies Flashcards
What are the 7 macroeconomic objectives:
- low and stable inflation
- full employment
- economic growth
- balance of payments
- balanced gov budget
- income redistribution
- concern for the environment
What are macroeconomic policy instruments:
Are simply the tools used to try and achieve its macro objectives by influencing AD or AS
- the government uses tools such as taxation and government spending levels
- Bank of England uses tools such as interest and control of the money supply
What are the macro policies available?
- fiscal policy
- monetary policy
- supply side policy
What is fiscal policy?
Decisions made by the government on its expenditure, taxation and borrowing.
- predominantly affects AD so is demand management
- implemented and controlled by the government through the budget
- involves changes to the level of government spending of taxation
- government can spend more than it receives from taxes in any year - referred to as the PSNCR
- accumulation of past deficits is known as ‘net debt’
- budget surplus: the government receive more than they spend
- 2 types of fiscal policy: expansionary or contractionary
Explain expansionary fiscal policy:
- needed when AD is low or expected to be low and unemployment is high
- demand for goods and services is insufficient to keep all FOPs employed, the government needs to expand the economy
- eg: spend on infrastructure or reduce taxation level
- current March budget 2017 - PSNCR is down 2.6 borrowing is at £58.3 billion
Explain contractionary fiscal policy
- used to discourage spending and reduce AD to deflate the economy
- excess demand can lead to demand-pull inflation
- may pursue this policy to reduce the budget deficit, so impose a tax. This is currently happening as we are going through ‘austerity’
Explain budget deficit?
Government spending exceeds tax revenue. In 2017-2018 it is estimated at £58.3bn
Explain budget surplus?
Tax revenue is greater than government spending. This last occurred in 2001.
Types of fiscal policy:
- discretionary fiscal policy: government chooses actively influences AD by changing its expenditure or taxes. They used to use counter cyclically
- automatic stabilisers: fiscal policy can occur automatically. If the economy is in recession the number of workers in jobs falls so spending on welfare automatically occurs
What is monetary policy?
Involves changing the money supply and interest rates in order to influence consumer and business spending and therefore influence AD.
- the price of money is known as the interest rate and is determined by both supply and demand
- monetary policy is know as the decisions made by the central bank regarding monetary variables such as the money supply and the interest rates
Monetary policy committee:
A committee of 9 employees of the BoE with the responsibility for meeting the governments inflation target, setting the base rate of interest and making detailed assessments of trends within the economy.
Bank of England’s main objectives:
- meet the inflation target, 2%
- the monetary policy must not contradict government objectives
- it is designed pre-emptive
Variables the MPC consider:
- indicators considered by the MPC
- GDP growth and the amount of spare capacity
- consumer and business confidence
- unemployment rates
- rate of growth of average wages
- amount of lending and consumer credit
- value of the £ against other major currencies
Expansionary monetary policy:
1) decreasing the base rate: makes it cheaper to borrow, lower monthly loan repayments, encourage investment in business and will discourage savings in UK banks depreciating the currency.
2) increasing the money supply: this can be done by quantitative easing, UK currently at £435bn
Contractionary monetary policy:
1) increase the base rate: people will save rather than spend
2) decreasing the money supply: you can print less money which means there’s less supply reducing AD
