Theme 2: Macroeconomic Objectives and Policies Flashcards
The 4 main Macroeconomic objectives
- Economic growth
- Low unemployment
- Low and stable rate of inflation
- Balance of payments equilibrium on current account
What is the UK’s long run trend of economic growth goal?
2.5% of sustainable economic growth
What is the aim for rate of unemployment in the UK?
3%
What is the government’s target inflation rate? and at what point does the Governor of the Bank of England write a letter to the Chancellor of the Exchequer?
2% and if the target falls 1% outside target
Why is the balance of payments in equilibrium important for the current account?
So the country can sustainably finance the current account, which is important for long term growth.
What are the 3 additional government macroeconomic objectives?
- Balanced government budget
- Protection of the environment
- Greater income equality
Why does the government want to keep control of state borrowing?
So the national debt does not escalate. This allows governments to borrow cheaply in the future should they need to, and makes repayment easier.
What is Monetary Policy and how does it achieve their aims? Who controls it?
Used by the government to control the money flow of the economy. Through controlling interest rates and quantitate easing. It is controlled by the Bank of England.
What is Fiscal Policy and how does it achieve their aims? Who controls it?
Uses government spending and revenues from taxation to influence AD. This is conducted by the government.
How do interest rates effect aggregate demand?
As they alter the cost of borrowing and the reward for saving. The bank controls the base rate which controls interest rates. A reduction is the base rate will lead to a rise in AD.
How does quantitate easing effect an economy and when is it used??
It increases the money flow which in theory encourages more investment, more spending and hopefully higher growth. It is used when inflation is low and it is not possible to lower interest rates further.
3 Limitations of monetary policy
- Banks might not pass on the base rates to consumers.
- Banks might be more risk averse so not want to lend.
- Most only work when consumer and firm confidence is high.
What is the biggest source of tax revenue for the government in the UK?
Income tax
What 3 things does the UK spend most of the budget on?
- Pensions and welfare benefits
- Health
- Education
Expansionary fiscal policy
Aims to increase AD. Governments increase spending or reduce taxes. Leads to worsening of the government budget deficit, governments might have to borrow more.
Deflationary fiscal policy
Aims to decrease AD. Government cut spending or raise taxes, which reduces consumer spending. Improvement of government budget.
Budget deficit
When expenditure exceeds tax receipts in a financial year.
Budget surplus
When tax receipts exceed expenditure
Direct taxes
Imposed on income and paid directly to the government from the tax payer. e.g. income tax, corporation tax and inheritance tax.
Indirect tax
Imposed on expenditure on goods and services and increase the cost of production for producers. They increase market price and demand contracts.
5 Limitations of fiscal policy
- Government might have imperfect information about the economy.
- Time lag
- The effect of the multiplier depends on how large the stimulus.
- If interest rates are high fiscal policy might not be effective for increasing demand.
- If the government spends too much they might struggle to pay it back making it difficult to borrow in the future.
What caused the great depression?
- Wall street crash of 1929
- Loss of consumer and business confidence
- Government allowed banks to crash
- The USA introduced protectionism whilst the UK was committed to the gold standard, where its currency was fixed to gold and overvalued.
Response in the UK to the great depression
- Government thought balancing the budget was essential to they cut public sector wages and unemployment benefits and raised income tax.
- Interest rates were kept high to maintain the pound.
- Eventually they left the gold standard and cut interest rates.
Response in the USA to the great depression
- Roosevelt’s new deal used public sector investment, work schemes for the unemployed and fiscal stimulus to increase AD and bring about a recovery.
- Some argue that not enough spending was undertaken for it to be effective.
- They also tried to increase the money supply.