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Economics Theme 2 > 2.6- Macroeconomic objectives and policies > Flashcards

2.6- Macroeconomic objectives and policies Flashcards

1
Q

What are the main economic objectives? (7)

A
  • Economic growth
  • low unemployment
  • low and stable inflation
  • balance of payment equilibrium on the current account
  • balanced government budget
  • protection of environment
    -greater income equality
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2
Q

Why does the government aim to increase economic growth?

A

by increasing economic development before economic growth, it will improve living standards, increase life expectancy and improve literacy rates.
In the UK long term trend of econ growth is about 2.5%

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3
Q

What do the government aim for the unemployment rate to be?

A

3%

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4
Q

Why do the government want low and stable inflation?

A

Target is 2% measured by CPI
This aims to provide stability for firms and consumers and will help them make decisions for the long run.

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5
Q

What happens if the inflation rates falls 1% outside the target?

A

The governor of the Bank of England has to write a letter to the Chancellor to explain what has happened.

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6
Q

Why is balance of payment equilibrium on the current account important?

A
  • important to allow the country to sustainably finance the current account, important for long term growth.
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7
Q

Why is a balanced government budget important?

A

Ensures the government keeps control of the state borrowing, so national debt doesn’t escalate.

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8
Q

Why is protection of the environment important?

A

Ensures resources used are not exploited, such as oil and natural gas.

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9
Q

Why is greater income equality important?

A

Minimises between rich and poor.
Makes society fairer.
Improves living standards for poorer.

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10
Q

What 2 demand side policies does the government use to achieve macroeconomic objectives?

A
  • fiscal
  • monetary
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11
Q

What is monetary policy?

A

Where the central bank attempts to control level of AD by altering base interest rates or the amount of money in the economy. or done through quantitative easing

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12
Q

What is fiscal policy?

A

The use of borrowing, government spending and taxation to manipulate the level of AD.

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13
Q

How are interest rates used within monetary policy to change AD?

A
  • Interest rates are used to help meet the government target of price stability.
  • The bank controls the base rate, which controls the interest rates.
    LOWER BASE RATE:
  • consumption and investment increase due to lower cost of borrowing.
  • higher consumption due to lower borrowing, means asset prices increase- positive wealth effect.
  • saving becomes less attractive, as a lower rate of return is offered.
  • mortgage interest repayments are lower, so consumers have more income left to spend.
  • lower interest rates reduce the incentive for investors to hold money in the bank, so demand for pound will fall. Exports cheaper, imports more expensive. Net trade will increase.
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14
Q

When is QE used?

A

Usually used when inflation is low and it is not possible to lower interest rates any further.

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15
Q

Why does QE have inflationary effects?

A

increases money supply and reduces the value of the currency.

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16
Q

Describe how QE is used in steps:

A
  • Interest rates are already low, and so it is not possible to lower them any further.
  • The bank bought assets in the form of government bonds using the money they have created.
  • This is then used to buy bonds from investors, which increases the amount of cash flowing in the financial system.
  • this encourages more lending to firms and individuals, cost of borrowing is lower.
  • The theory is that this encourages more investment, more spending and hopefully higher growth.
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17
Q

What does the bank of England do if inflation gets high?

A

The Bank of England can reduce the supply of money in the economy by selling their assets. This reduces the amount of spending in the economy.

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18
Q

What are the limitations of monetary policy?

A
  • even if the central bank changes the interest rate, it might not have the intended effect.
  • Even if the cost of borrowing is low, banks might still be unwilling to lend.
    -Interest rates will be more effective at stimulating spending and investment when consumer and firm confidence is high.
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19
Q

What does the UK government spend most of their budget on and what is their biggest source of revenue?

A
  • spends most on welfare benefits, followed by health and education.
    -income tax= biggest source of rev
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20
Q

What is expansionary fiscal policy?

A
  • Increases AD
    -Gov increases spending or reduces taxes to do this.
    -Leads to worsening of government budget deficit.
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21
Q

What is contractionary fiscal policy?

A

-Aims to reduce AD.
-Gov cut spending or raise taxes, which reduces consumer spending.
-Improves government budget deficit.

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22
Q

What is a government budget deficit?

A

When expenditure exceeds tax

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23
Q

What is a government budget surplus?

A

When tax receipts exceed expenditure

24
Q

What is a direct tax?

A

Imposed on income and are paid directly to the government from the tax payer. Examples- income tax

25
Q

What is an indirect tax?

A

imposed on goods and services and they increase production costs for producers.

26
Q

What are the limitations of fiscal policy? (6)

A
  • governments might have imperfect information.
  • is a time lag involved with employing fiscal policy.
  • If the gov borrows from the private sector, there are fewer funds available for the private sector- leading to crowding out.
  • The bigger the size of the multiplier, the bigger the effect on AD- more effective policy.
  • If interest rates are high, fiscal policy won’t be affective for increasing demand.
  • If gov spends too much, could be difficulties paying it back in the future.
27
Q

Context of the Great depression:

A
  • started in 1929
    -by 1933 real GDP had fallen by 30% and unemployment rate increased to 25%.
    -Lasted over a decade.
28
Q

What were the causes of the great depression?

A

It was set off by the Wall street crash of 1929. (An american stock market crash)
Led to a huge loss in consumer and business confidence, decreasing consumption and investment.
The 1920s had been a period of unsustainable boom and the banking system was unstable, gov allowed banks to crash.

29
Q

What were the responses to the great depression in the UK?

A

-They wanted to balance the budget.
-They cut public sector wages and benefits and raised tax.
-Interest rates were high to help maintain the pound.
-Eventually they left the gold standard and cut interest rates.

30
Q

What were the responses to the great depression in the USA?

A

-Roosevelt’s New deal used public sector investment, work schemes for the unemployed and fiscal stimulus to increase AD.
-Some argue that not enough spending was undertaken for it t be effective- it was the war that eventually ended the depression.

31
Q

What were the causes of the Global Financial Cricis?

A

-Decline in world GDP 2008-2009
-Before the crash, asset prices were high and rising and there was a boom in economic demand.
-There were risky bank loans and mortages, especially in US.
-This means the borrowers had poor credit histories.

32
Q

What were the policy responses to the financial cricis in UK and USA?

A
  • Both governments were forced to nationalise banks and building societies.
    -They guaranteed savers their money.
    -They used low interest rates, and QE.
    -The Uk VAT was cute from 17.5 to 15%.
    -The USA used more expansionary fiscal policy, this is perhaps why it recovered faster.
33
Q

What do supply side policies aim to do?

A

Aim to improve the long run productive potential of the economy.

34
Q

What is the disntinction between market based and interventionist policies?

A

Market based policies- limit the intervention of the government and allow the free market to eliminate imbalances. Force of supply and demand are used.
Interventionist- rely on the government intervening in the market.

35
Q

What are the 3 market based objectives?

A
  • to increase incentives
  • to promote competition
  • to reform the labour market
36
Q

How do market based policies increase incentives?

A
  • Reducing income and corporation tax to encourage spending and investment.
    -Reducing benefits to increase the opportunity cost of being out of work.
36
Q

How do market based policies increase incentives?

A
  • Reducing income and corporation tax to encourage spending and investment.
    -Reducing benefits to increase the opportunity cost of being out of work.
36
Q

How do market based policies increase incentives?

A
  • Reducing income and corporation tax to encourage spending and investment.
    -Reducing benefits to increase the opportunity cost of being out of work.
37
Q

How do market based policies promote competition?

A

By deregulating or privatising the public sector, firms can compete in a competitive market, also help improve economic efficiency.

38
Q

How do market based policies reform the labour market?

A

-Reducing the MNW will allow free market forces to allocate wages and the labour market should clears.
-Reducing trade union power makes employing workers less restrictive and it increases the mobility of labour. This makes the labour market more efficient.

39
Q

What are the 4 main objectives of interventionist policies?

A
  • promote competition
    -reform the labour market
    -improve skills and quality of the labour force.
    -improve infrastructure
40
Q

How do interventionist policies promote competition?

A

-A stricter government competition policy could help reduce the monopoly power of some firms and ensure smaller firms can compete too.

41
Q

How do interventionist policies help to reform the labour market?

A
  • Governments try and improve the geographical mobility of labour by subsidising the relocation of workers.
42
Q

How do interventionist policies help to improve skills and quality of the labour force?

A

Government could subsidise training.
This also lowers costs for firms, since they have to train fewer workers.
More money on education
More money on healthcare- improve quality of workers.

43
Q

How do interventionist policies help to improve infrastructure?

A

Gov could spend more on things such as improving schools and roads.

44
Q

What are the strengths of supply-side policies?

A
  • supply side policies are the only policies that can deal with structural unemployment because labour market can be directly improved with education and training.
45
Q

What are the weaknesses of supply side policies?

A
  • Demand side policies are better at dealing with cyclical unemployment since they can reduce the size of a negative output gap and shift AD to the right.
  • There are significant time lags associated with supply side policies.
  • Market based supply side policies, such as reducing tax, could lead to an unequal distribution of wealth.
  • Can be impacts on gov budget due to higher government expenditure.
  • If there is lot of spare capacity in the economy, then supply side policies will have no impact.
46
Q

Conflict Econ growth Vs inflation:

A
  • A growing economy is likely to experience inflationary pressures. This is especially true when there is a positive output gap and AD increases faster than AS.
47
Q

Conflict Econ growth V current account

A

During periods of econ growth, consumers have high levels of spending.
In the UK, there will be a higher propensity to import- likely to be more spending on imports. Leads to worsening of current account.

48
Q

Conflict econ growth Vs gov budget deficit

A

Reducing a budget deficit would mean more tax revenue. This would lead to a fall in AD, less economic growth.

49
Q

Conflict econ growth V the environment

A

High rates of econ growth can result in high externalities , such as pollution

50
Q

Conflict Unemployment Vs inflation

A

In the short run, there is a trade off between the levels of unemployment and the inflation rate- illustrated by PHILLIPS CURVE
- As econ growth increases, unemployment falls due to more jobs being created.
-However this causes wages to increase, which can lead to more consumer spending and an increase in the average price.

51
Q

Environment vs competition

A

If “green taxes” are implemented, such as carbon taxes, or if there are minimum prices on pollution permits, the competitiveness of domestic firms could be compromised.

52
Q

Fiscal vs monetary policy

A

Expansionary fiscal policies involve more government borrowing, which could cause interest rates and inflation rate to rise.

53
Q

Interest rate vs inequality

A

The low interest rate could affect the distribution of income. Savers only receive a small return on their savings.

Economics Theme 2 (6 decks)

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