Theme 2 - The UK economy - Performance and Policies (2.6 - Macroeconomic Objectives and Policies)

Question 1

What is the purpose of a macroeconomic objective? [1]

Ref - 2.6.1 - Possible Macroeconomic Objectives

Answer 1

For the government to aim to increase the country’s economic welfare. [1]

Question 2

State 4 possible macroeconomic objectives in the UK economy [4]

Ref - 2.6.1 - Possible Macroeconomic Objectives

Answer 2

Economic Growth [1]
Low Unemployment [1]
Low and Stable Inflation [1]
A Balanced Government Budget [1]
A Balance of Payments on Current Accounts [1]

Question 3

Explain how increased economic growth increases economic welfare. [2]

Ref - 2.6.1 - Possible Macroeconomic Objectives

Answer 3

Increased economic growth will increase GDP and income for workers [1], therefore improving the quality of life. [1]

Question 4

Explain how low unemployment increases economic welfare [2]

Ref - 2.6.1 - Possible Macroeconomic Objectives

Answer 4

Low unemployment increases the efficiency of an economy [1], therefore increasing the GDP of a country. [1]

Question 5

Explain how a low and stable inflation can increase economic welfare [2]

Ref - 2.6.1 - Possible Macroeconomic Objectives

Answer 5

Low and stable inflation gives a stable environment for businesses to invest and grow [1], therefore increasing the UK’s international competitiveness. [1]

Question 6

What is meant by a balance of payments on the current account? [1]

Ref - 2.6.1 - Possible Macroeconomic Objectives

Answer 6

When the value of exports (X) is greater than or equal to the value of imports (M) [1]

Question 7

Explain why these possible macroeconomic objectives may cause damages to the environment [2]

Ref - 2.6.1 - Possible Macroeconomic Objectives

Answer 7

Macroeconomic objectives such as economic growth uses resources such as oil,[1] therefore contributing to global warming. [1]

Question 8

Define Fiscal Policy. [1]

Ref - 2.6.2 - Demand Side Policies

Answer 8

Use of government spending and taxation to influence AD. [1]

Question 9

Describe the difference between expansionary and contractionary fiscal policy. [2]

Ref - 2.6.2 - Demand Side Policies

Answer 9

(Contractionary) - Aims to decrease AD [1]
(Expansionary) - Aims to increase AD [1]

Question 10

Define the terms budget (fiscal) deficit and surplus [2]

Ref - 2.6.2 - Demand Side Policies

Answer 10

Budget Deficit - G>T [1]
Budget Surplus - T>G [1]

Question 11

Explain 2 consequences of running a budget deficit [4]

Ref - 2.6.2 - Demand Side Policies

Answer 11

Crowding out - Higher government borrowing increases market interest rates [1], therefore C+I+G+(X-M) is restricted. [1]

Reduced lending confidence - Investors may not lend money [1] as they aren’t confident that the UK can pay the debt back. [1]

Question 12

Define monetary policy. [1]

Ref - 2.6.2 - Demand Side Policies

Answer 12

Use of interest rates and the money supply to influence AD. [1]

Question 13

Give an example of contractionary and expansionary monetary policy. [2]

Ref - 2.6.2 - Demand Side Policies

Answer 13

Expansionary - Increasing the money supply via QE. [1]
Contractionary - Increasing interest rates. [1]

Question 14

Define interest rates and the base rate [2]

Ref - 2.6.2 - Demand-side Policies

Answer 14

Interest rates - The cost of borrowing and the reward of saving. [1]

Base rates - The minimum interest rate set by the central bank. [1]

Question 15

Define quantitative easing. [1]

Ref - 2.6.2 - Demand-side Policies

Answer 15

A process by which liquidity in an economy is increased as the central bank purchases assets from commerical banks. [1]

Question 16

Describe the process of quantitative easing. [8]

Ref - 2.6.2 - Demand-side Policies

Answer 16

• Central bank creates electronic money. [1]
• Government bonds are bought from commercial banks. [1]
• Increased demand for Gov. bonds increases prices for them. [1]
• And decreases the yield (profit) from Gov bonds. [1]
• Banks can either lend or invest into risky stocks/shares. (e.g. corporate bonds) [1]
• Assuming profit is made, banks are more willing to lend. [1]
• Therefore market interest rates may fall, stimulating investment, consumption etc. [1]
• Increasing AD [1]

Question 17

Describe the role of the monetary policy committee [2]

Ref - 2.6.2 - Demand-side Policies

Answer 17

Discussing appropriate monetary policy tools in order to meet target inflation. [1]

e.g. discussing whether to increase, decrease, or keep interest rates the same. [1]

Question 18

What are the 2 factors considered by the MPC relating to interest rates? [2]

Ref - 2.6.2 - Demand-Side Policies

Answer 18

• Demand-pull factors (Changes in AD) [1]
• Cost-push factors (Changes in costs of production) [1]

Question 19

Explain 1 strength of demand-side policies. [3]

Ref - 2.6.2 - Demand-Side Policies

Answer 19

Achieving macroeconomic objectives [1] e.g. QE increasing money supply [1], therefore reducing commercial banks interest rates. [1]

Question 20

Explain 1 weakness of demand-side policies. [3]

Ref - 2.6.2 - Demand-Side Policies

Answer 20

Causes conflicts w/ macro objectives. [1] E.g. QE increasing money supply decreases interest rates [1], but increases demand-pull inflation due to higher consumption. [1]

Question 21

Describe the events leading up to the Great Depression (1929-37) [4]

Ref - 2.6.2 - Demand-Side Policies

Answer 21

The US experienced a credit boom [1] shortly before the Wall Street Crash [1], impacting the US stock market. [1] World economy collapsed as it relied on US finance. [1]

Question 22

Describe 1 example of fiscal and monetary policy used during the Great Depression by the UK. [2]

Ref - 2.6.2 - Demand-Side policies

Answer 22

Fiscal - Balancing the budget - Income tax rise from 22.5% to 25%. [1]

Monetary - Abandoning the gold standard - Allowing reduced interest rates from 6% to 2%. [1]

Question 23

Describe the events leading up to the Global Financial Crisis. [4]

Ref - 2.6.2 - Demand-Side Policies

Answer 23

US housing market saw a boom. [1] A rise in mortgage defaults led to banks losing money. [1] This caused a fall in house prices, reducing consumption. [1] A decrease in bank lending reduced business investment. [1]

Question 24

Describe 1 example of fiscal and monetary policy used during the GFC by the UK. [2]

Ref - 2.6.2 - Demand-Side policies

Answer 24

Fiscal - £20 billion Small Enterprise Loan Guarantee Scheme. . [1]

Monetary - MPC reduce base rate from 5.75% to 5.5%. [1]

Question 25

What is the purpose of supply-side policies? [1]

Ref - 2.6.3 - Supply-Side Policies

Answer 25

To increase LRAS and increase full employment level (Yfe) [1]

Question 26

What is the difference between market-based and interventionist supply side policies? [2]

Ref - 2.6.3 - Supply-Side Policies

Answer 26

Market-based policies let the market work freely to provide incentive to boost LRAS, [1] while interventionist policies aims to use government intervention to increase LRAS. [1]

Question 27

Explain 2 examples of market-based policies in action. [6]

Ref - 2.6.3 - Supply-Side Policies

Answer 27

• (Incentive) - Reducing unemployment benefits. [1] This reduces the reward of being unemployed, [1] therefore incentivising workers to gain available jobs, boosting LRAS. [1]
• (Competition) - Privatising industries. [1] This gives incentives for firms to work for higher profits, [1] as competition increases, so LRAS increases due to higher output. [1]

Question 28

Explain 2 examples of interventionist policies in action. [6]

Ref - 2.6.3 - Supply-Side Policies

Answer 28

• (Incentive) - Subsidies for R&D [1] - More R&D aids businesses in becoming more productive, [1] therefore increasing output, and LRAS. [1]
• (Reform Labour Market) - Improving labour mobility [1] - e.g. providing training to under qualified labour (occupational) [1], or relocation subsidies (geographical) [1]

Question 29

Explain 1 strength of supply-side policies. [2]

Ref - 2.6.3 - Supply-Side Policies

Answer 29

Achieving macroeconomic objectives [1] - e.g. Increasing LRAS will see an increase in potential growth. [1]

Question 30

Explain 1 weakness of supply-side policies. [3]

Ref - 2.6.3 - Supply-Side Policies

Answer 30

Problems managing AD. [1] High growth in AD will cause demand-pull inflation [1], while low growth in AD will not have the effect of increasing economic growth. [1]

Question 31

What is the purpose of the Short-Run Philips Curve? [3]

Ref - 2.6.4

Answer 31

This curve shows an inverse relationship [1] between the % change in wages [1] and the level of unemployment. [1]

Question 32

Describe the general shape of the Philip’s curve. [1]

Ref - 2.6.4

Answer 32

The curve exponentially gets smaller [1]

Page 85 (Pack 2) - Diagram

Question 33

Explain the meaning behind the shape of the Philip’s curve. [6]

Ref - 2.6.4

Answer 33

A rise in demand-pull inflation [1] is associated with higher levels of GDP [1], therefore an increase in employment levels. [1] This is because as employment reaches Yfe, [1] resources become scarce, therefore prices of resources increase. [1] Therefore this shows a trade-off between inflation and unemployment. [1]

Page 85 (Pack 2) - Diagram

Question 34

What are the 2 main macroeconomic objectives that may be in conflict? [2]

Ref - 2.6.4

Answer 34

• Inflation [1]
• Economic Growth [1]

Question 35

State and explain 1 macroeconomic conflict relating to inflation. [4]

Ref - 2.6.4

Answer 35

Inflation + Unemployment [1]
- If demand-pull inflation decreases [1], this may cause a decrease in employment, [1] as GDP levels decreases. [1]

Question 36

State and explain 1 macroeconomic conflict relating to economic growth. [4]

Ref - 2.6.4

Answer 36

Economic growth + Inflation [1]
- Increased economic growth will cause rises in GDP [1]
- Therefore, AD increases as consumption increases [1]
- Increases employment. [1]