2.6 Macroeconomic objectives and policies

Question 1

Seven macroeconomic objectives

Answer 1

-control inflation
-economic growth
-reduce unemeployment
-improve the balance of payments
-improve government debt
-improved sustainability
-reduce inequality

Question 2

how do the government achieve their objectives?

Answer 2

through monetary and fiscal policy

Question 3

In a recession what do the government do?

Answer 3

They often increase AD to increase employment and economic growth

Question 4

In a boom what do the government do?

Answer 4

they will decrease AD to decrease inflationary pressures. They may also use supply side policies, which aim to bring about long-term growth

Question 5

Expansionary policy

Answer 5

aimed at increasing AD to bring about growth

Question 6

deflationary policy

Answer 6

attempts to decrease AD to control inflation.

Question 7

Monetary policy

Answer 7

where the central bank or regulatory authority attempts to control the level of AD by altering base interest rates or the amount of money in the economy

Question 8

Fiscal policy

Answer 8

use of borrowing, government spending and taxation to manipulate the level of aggregate demand and improve macroeconomic performance.

Question 9

two tools of demand management

Answer 9

-government spending
-taxation

Question 10

tools of tight fiscal policy

Answer 10

-increase taxation
-decrease government spending

Question 11

what is tight policy is also known as

Answer 11

contractionary

Question 12

tools of loose fiscal policy

Answer 12

-decrease taxation
-increase government spending

Question 13

Impact of tight policy on inflation

Answer 13

-raised taxes leads to a drop in aggregated demand do inflation drops (disinflation), inflation is controlled

Question 14

Impact of tight policy on economic growth

Answer 14

-dropped demand means firms will produce less, which will reduce output hence less economic growth

Question 15

Impact of tight policy on unemployment

Answer 15

-as firms are producing less, there won’t be as many jobs avaliable, which will increase the rate of unemployment

Question 16

Impact of tight policy on increased sustainability

Answer 16

-less produced so therefore less non renewals used making everything more sustainable

Question 17

Impact of tight policy on government debt

Answer 17

-in short run, deficit will be reduce as taxes increased and government spending reduced.

Question 18

Impact of tight policy on inequality

Answer 18

-more people are facing inequality, as unemployment has increased. however the gap will be smaller, due to higher taxes and a drop in demand

Question 19

Impact of tight policy on balance of payments

Answer 19

-improve as exports will increase and imports will decrease.
-drop in demand leads to drop in imports
-In LT exports should increase as exports should become more competitive and therefore increase

Question 20

Evaluation impact of tight policy on inflation

Answer 20

depends on the type of inflation. demand pull inflation will have a greater impact than cost push

Question 21

Evaluation impact of tight policy on economic growth

Answer 21

depends on the magnitude of tight policy

Question 22

Evaluation impact of tight policy on unemployment

Answer 22

ST/LT as in LT workers will be needed, depends on what industry, occupational and geographical mobility

Question 23

Evaluation impact of tight policy on sustainability

Answer 23

less government subsides due to less money in the circular flow means less investment in green and sustainable projects

Question 24

Evaluation impact of tight policy on governement debt

Answer 24

In LT government debt will increase as more ar eunemployed and claiming JSA/benefits

Question 25

Evaluation impact of tight policy on inequality

Answer 25

depends on the magnitude of inflation and unemployment

Question 26

Evaluation impact of tight policy on balance of payments

Answer 26

imports are inelastic and exports depend on the magnitude of disinflation and determinants on other factors.

Question 27

Impact of loose policy on inflation

Answer 27

aggregate demand increases, which leads to inflation

Question 28

Impact of loose policy on economic growth

Answer 28

aggregate demand increases so firms need to produce more hence economic growth

Question 29

Impact of loose policy on unemployment

Answer 29

as firms need to produce more then they will employ more workers to produce more

Question 30

Impact of loose policy on government debt

Answer 30

in ST deficit will increase as taxes have been reduce and the government is spending more

Question 31

Impact of loose policy on inequality

Answer 31

less people are facing inequality as more are employed however the gap is bigger due to inflation

Question 32

Impact of loose policy on sustainability

Answer 32

more is being produce so more non renewables a re used making it less sustainable

Question 33

Impact of loose policy on balance of payments

Answer 33

exports will decrease and imports will increase. increase in demand leads to an increased imports. BoP will be negatively impacted.

Question 34

Budget deficit

Answer 34

when the government spends more money than they receive.

Question 35

Budget surplus

Answer 35

when the government receives more money than they spend.

Question 36

Which taxes will the governemnt increase/decrease?

Answer 36

VAT, income tax

Question 37

Direct taxes

Answer 37

paid directly to the government by the individual taxpayer.

Question 38

Indirect taxes

Answer 38

where the person charged with paying the money to the government is able to pass on the cost to someone else

Question 39

problems with fiscal policy

Answer 39

Government spending also impacts LRAS. For example, by cutting government spending to reduce AD, the government may be reducing the quality of education or
spending on research and technology.
-Taxes and spending have an impact on inequality, so some decisions aimed to reduce/increase demand may increase income inequality. They also have an impact
on incentives, for example high taxes reduce incentives.
-The government also has to worry about political issues, for example they may be unwilling to raise taxes in order to reduce demand as this may lead to them being voted out of government
-Expansionary fiscal policy is difficult to undertake during a period of austerity. The government needs to consider the effect of policies on the budget.
-The impact of fiscal policy depends on the multiplier: the bigger the multiplier, the bigger the impact on AD. Classical economists argue that the multiplier is almost zero whilst Keynesian economists argue that it can be large if targeted correctly.

Question 40

Monetary vs Fiscal

Answer 40

-Monetary policy is useful as the government is able to increase demand without having to increase their spending, which would result in a larger fiscal deficit.
Classicists argue that if demand management is going to be done only monetary policy should be used.
-Fiscal policy can have significant impacts on the supply side of the economy, for example increases in spending on education to increase AD will also increase LRAS.
Moreover, it is more effective at targeting specific groups and reduce poverty, for example by increasing benefits it can increase AD and reduce inequality.

Question 41

Supply side policies

Answer 41

government policies aimed at increasing the productive potential of the economy and moving the supply curve to the right. Over time, there tend to be supply-side improvements independent of the government, through actions of the private sector such as investment.

Question 42

Market based policies

Answer 42

policies which are designed to remove anything that
prevents the free market system working efficiently, causing lower output and higher prices. These barriers include those which reduce willingness of workers to take jobs or lead to inefficient production, high prices or a lack of risk-taking.

Question 43

Interventionist policies

Answer 43

policies designed to correct market failure, for example
the free market under provides education and so the government provides it. Also, firms may only look into the short term and look to maximise short run profits to give
to shareholders instead of investing, so governments may take actions to encourage investment.

Question 44

Examples of supply side policies

Answer 44

-increase incentives
-promote competition
-reform the labour market
-improve skills and quality of the labour force
-improve infrastructure

Question 45

Increase incentives

Answer 45

-By increasing the incentive for people to go to work or firms to employ people, the government will increase the size of the workforce and this would mean more goods and services would be produced.
-A reduction in benefits/taxes will increase the opportunity cost of being out of work and mean that people are always better off within work than on benefits. This is why the government have introduced Universal Credit, which
helps to ease the transition into and out of work.
-A reduction in benefits may prevent the poverty/unemployment trap, where low income workers end up in the same or an even worse position after they
gain a new job because of the benefits they lose. The unemployment/poverty trap can also be solved by subsiding workers i.e. lower income workers receive income tax credits instead of paying income tax.
-Moreover, they could encourage parts of the workforce back to work, for example women could be offered free childcare and flexible hours.

Question 46

Problem with increase incentives

Answer 46

this method is that many people will argue a small change in any tax, for example from 25% to 20%, will have little impact on people’s incentive to work. Reductions of tax on high income earners will lead to more income inequality
and any reduction will mean governments have less revenue so have to decrease spending or borrow more. Reducing benefits will also worsen equality.

Question 47

Promote competition

Answer 47

-Privatisation, selling nationalised companies to private sectors, or deregulation, reducing restriction on businesses which restrict entry to the market, makes firms
more competitive.
-Competition policy is used to prevent monopolies in the market and make cartels and price fixing agreements illegal. The CMA is the body in the UK which ensures
markets are competitive and the Competition Act (1998) and Enterprise Act (2002) were passed with the same aim.

Question 48

what is the argument about competition?

Answer 48

The belief is that competition is necessary to make firms efficient as they have to offer a cheaper or better service if there is competition. Free market economists argue that governments have little incentive to cut costs or innovate so nationalised industries are inefficient and causes government failure.

Question 49

Reform the labour market

Answer 49

-By increasing the retirement age, there will be more people working and so more goods and services could be produced.
-the labour market could become more flexible in order to make it more efficient as it can respond to external changes, such as changes in demand for a product or population changes.
-If the minimum wage is set above the equilibrium level it will cause increased unemployment, so some people argue the minimum wage should be scrapped to prevent real-wage inflexibility unemployment
-The reduction of benefits will also increase incentive to work and help to reform the labour market. Universal Credit is helping to reform the labour market, although it is currently experiencing problems in setting it up.
-On the whole, all of these methods would reduce unemployment, which represents a waste of resources, and mean that more goods and services can be produced as the labour force is bigger.

Question 50

ways to make the labour market more flexible

Answer 50

One way to do this is through weakening of unions. For example, the government has introduced postal ballots, banned secondary picketing and reduced the picket line to only 7 people. Unions now have to give 14 days’
notice before strikes and have a higher turnout and support for strikes in ballots. Trade unions push up wages which can lead to businesses laying off some workers and reducing production, which limits AS, and so therefore
reducing their power will hope to prevent this.
-Also, businesses have attempted to be more flexible by changing employment contracts, for example zero-hour contracts.

Question 51

Evaluation of a reformed labour market

Answer 51

trade unions are already very weak in the UK so reducing their power further may have little effect. Similarly, reducing benefits will lower AD if these people are unable to get jobs and this will cause a further fall in employment. The reduction in benefits is likely to have a multiplied effect as the poor have a very high MPC and so a reduction in their income will cause a large fall in spending, meaning AD falls by a lot. It may also mean there is increased income inequality. Making the labour force more flexible will lead to decreased quality of life as people are less secure in their jobs and may have to work odd hours. It will also mean some people receive very low pay, which will increase income inequality and may reduce AD.

Question 52

increased education and skills of workforce

Answer 52

-They could increase spending on education and training to create a more educated workforce who will be more efficient and be able to do more skilled jobs, increasing the number of goods and services produced. This could be in terms of academic education, such as free university tuition, more spending on secondary school etc
-they could introduce regulation which forces businesses to continuously train their own staff, to keep them up with developments
-An increase in high skilled migrants would also improve the quality of the workforce

Question 53

Eval of increased education

Answer 53

improving education may have no effect if it is in skills not relevant to the workforce. Increasing education will incur an opportunity cost as it means government money will be lost in other sectors. It will also take time to see the effects of increased education and more investment may not necessarily increase the quality of education

Question 54

Improve infrastructure

Answer 54

-This could be done through offering tax incentives or subsidies on investment. For example, businesses who invest their profits could see lower tax rates.
-the government could spend money to improve infrastructure themselves
-This will mean new technology will be developed and more will be invested in buying new technology. Improvements in technology will mean that production is more efficient so less resources are needed to produce the same amount of goods whilst more technology will mean more goods and services can be produced.

Question 55

Eval of improved infrastructure

Answer 55

Offering tax breaks/subsidies could have adverse
effects on the government budget as it will mean they lose tax revenue or incur an opportunity cost as they have to spend money on subsidies. Some businesses may not actually invest this money and instead used it as a method of tax evasion. Moreover, not all investment will be successful in improving supply as it may not achieve its aim or it may not be aimed at increasing supply.

Question 56

Eval of supply side policies

Answer 56

-Unlike demand-side policies, supply side policies are able to both increase output and decrease prices.
-They are more long-term policies and lead to long term economic growth, rather than small changes in economic growth following changes in AD.
-Moreover, they can be directed at increasing exports which will also improve the balance of payments.
-the Keynesian LRAS curve shows that they have no impact when LRAS is elastic, and so demand-side policies are needed to fix the problem in the short run.

Question 57

Connections betwen objectives

Answer 57

-Economic growth vs. protection of the environment
-Economic growth vs. Balance of Payments
-Unemployment vs Inflation- Short run Phillips curve

Question 58

Economic growth vs. protection of the environment

Answer 58

As the economy grows, we expect more resources to be used. As we use resources and produce goods, we produce pollution and noise and destroy habitats. Economic growth in China has been rapid but it has led to serious levels of pollution. Economic growth can be achieved without damaging the environment, but the growth is likely to be slower and have higher costs.

Question 59

Economic growth vs. Balance of Payments

Answer 59

Some countries such as India have seen rapid economic growth leading to balance of payments problems. The country is so large that its industry is largely producing goods for its own people and the wealth of the people
has led to increased demand for imported goods. In comparison, China has seen massive growth but that has been largely been by producing goods for exports and therefore their balance of payments is in a surplus.

Question 60

Unemployment vs Inflation- Short run Phillips curve

Answer 60

A. W. Phillips found a trade-off between inflation and unemployment, called the Phillips curve. He found the
existence of an empirical regularity, which said that the rate of change in money wages increased as the rate of unemployment fell. This was then generalised into a relationship between unemployment and inflation, by arguing that firms pass on increases in wages to
the customer in increased prices. The reason for this connection is that businesses know that if there is a high level of unemployment, they can attract the workers they want with low wages. If there is high employment, firms are competing for the best workers and the way to
obtain the best is by offering higher wages. Initially, the Phillips curve seemed to accurately show the relationship well. However, during the 1970s, we saw high levels of unemployment and low inflation, called stagflation.

Question 61

Connections between policies

Answer 61

-Expansionary and deflationary fiscal and monetary policies
-changes in interest rates
-supply side policies
-fiscal deficits

Question 62

Expansionary and deflationary fiscal and monetary policies

Answer 62

Expansionary policies will increase AD, to increase output, employment and economic growth but will lead to increased inflation and may worsen the balance of payments as some of the increased demand for goods and services will be met by imports. On the other hand, deflationary policies will decrease AD to improve inflation but will decrease employment and economic growth

Question 63

changes in interest rates

Answer 63

An increase in interest rates will be used to decrease
inflation. However, continuously high rates will damage long-term investment as less businesses will want to invest, and this will decrease long-term growth. Moreover, they will raise the value of the pound which will decrease exports and increase imports, worsening the balance of payments. Also, the interest rate will affect distribution of wealth: high interest rates benefit savers and lenders, tending to be older people as they are more likely to have
savings. Low interest rates tend to increase income inequality, as the richest people hold a larger proportion of their wealth in non-money assets, such as stocks, shares and belongings and so aren’t affected much by interest rates, whilst middle and working-class people are more likely to have savings in the bank.

Question 64

connection of supply side policies

Answer 64

Supply side policies intend to increase aggregate supply, and therefore improve long term economic growth. They are also able to decrease long term inflation but may increase it in the short term if they encourage investment as this will increase AD. Moreover, policies which decrease trade union power, reduce wages, lower benefits, change taxation etc. may increase income equality as these will negatively affect the poorest in the country. Some supply-side policies have adverse effects on the budget or on the environment.

Question 65

fiscal deficits

Answer 65

In order to reduce fiscal deficits, the government may decide to reduce government spending and increase taxes. Firstly, this will reduce AD and decrease short term economic growth and higher unemployment. Also, the higher the fall in output as a result of these measures, the higher the fall in tax revenues will be and so therefore the more ineffective the policy. Moreover, it is likely to affect income equality as the poor are the ones who use the government services most and so will be worst affected

Question 66

Phillips curve

Answer 66

-as the rate of unemployment falls, labour shortages may cause an increase in wage inflation
-when an economy is booming so does the demand for components and raw materials lead to higher costs
-rising demnad and falling unemployment can lead to suppliers increasing prices.

Question 67

critiscms of the phillips curve

Answer 67

-blmaes economic growth for inflation
-might lead to stagflation - the economy does not grow but inflation is growing
-ignores policies to reduce pressures of low unemployment on inflation

Question 68

if supply side policies are successful they will:

Answer 68

-stimulate economic growth
-create economic growth
-allowing output and employment to increase while maintaining a stable inflation level

Question 69

problems with fiscal policy

Answer 69

-recognition lags –> time to implement delays
-imperfect information
-response lags
-magnitude
-size of multiplier

Question 70

liquidity trap

Answer 70

confidence is low in times such as recession, so people don’t spend and instead save.

Question 71

why is the crowding out theroy used ?

Answer 71

If the government runs a big budget deficit, it will have to sell debt. Getting institutions to purchase debt may require higher interest rates.

Question 72

Crowding out theroy

Answer 72

1) A rise in interest rate may then crowd out private investment and consumption
2) Eventually higher government spending needs to be funded by higher taxes. This squeezes spending and investment by the private sector
3) A fiscal stmulus is therefore less effective in an expansion
4) At full capacity, an increase in public demand crowds out private demand

Question 73

Result of crowding out

Answer 73

Level of output is unchanged but with higher prices

Question 74

Evaluation of crowding out

Answer 74

-the probability of 100% crowding out is remote especially if they economy is operating below its capacity and if there is a plentiful supply of saving available to purchase newly issued state debt.
-Keynesian economists argue that fiscal deficit crowd in private-sector investment
-well targeted timely and temporary increases in government spending can absorb under utilised capacity and provide a strong multiplier effect that generates extra tax revenue
-the available supply of loanable funds is not limited to the domestic sources external finance is available from other countries

Question 75

tight monetary policy aims to

Answer 75

decrease the money supply

Question 76

loose monetary polocy aims to

Answer 76

increase the money supply

Question 77

tools of monetary policy

Answer 77

-interest rates
-QE
-creadit avaliability
-exchange rates

Question 78

4 ways a rise in interest rates lead to a fall in AD

Answer 78

-increase the cost of borrowing
-fall in prices for these assets
-less confidence
-value of the pound rises

Question 79

problems with using IR as a method of demand management

Answer 79

-time lag - takes 18 months for IR to take effect
-exchange rates may be effected, leading to a balance of trade deficit
-interest rates are low already, so cannot be reduced any further
-lots of different exchange rates and not all of them are effected by the BoE base rate
-A lack of confidence in the economy may mean that, no matter how low interest rates are, consumers and businesses do not want to borrow or banks do not want to lend to them.
-High interest rates over a long period of time will discourage investment and decrease LRAS.

Question 80

Tight monetary policy tools

Answer 80

-increase IR - borrow less as it costs more to borrow
-decrease credit avaliability - demand will drop as people will save rather than spend.

Question 81

Tight monetary - inflation

Answer 81

inflation will decrease as people aren’t spending so demand will decrease

Question 82

Tight monetary - inequality

Answer 82

more facing inequality, but the gap is smaller

Question 83

Tight monetary - inequality eval

Answer 83

gap will get bigger as interest rates are higher which leads to the wealth effect

Question 84

Tight monetary - unemployment

Answer 84

more people will be unemployed as less workers are needed

Question 85

Tight monetary - economic growth

Answer 85

demand has decreased, so less output and therefore less economic growth

Question 86

Tight monetary - governement debt

Answer 86

the deficit will increase and the debt will continue to increase

Question 87

Tight monetary - sustainability

Answer 87

will improve as less is being produced

Question 88

Tight monetary - balance of payments

Answer 88

imports will fall and exports will decrease as they become more competitive as inflation is controlled

Question 89

Tight monetary - balance of payments eval

Answer 89

people will want to save in uk banks as pound is strong if UK IR are higher than europe

Question 90

tools of loose monetary policy

Answer 90

-decrease IR
-increase credit avaliabilty
-QE

Question 91

loose monetary - inflation

Answer 91

Inflation will increase as demand will increase

Question 92

loose monetary - inequality

Answer 92

less facing policy, but the gap will be bigger

Question 93

loose monetary - economic growth

Answer 93

demand is higher so firms produce more leading to economic growth

Question 94

loose monetary - unemployment

Answer 94

more will be employed because firms need to produce more

Question 95

loose monetary - government debt

Answer 95

the deficit will decrease but debt will still increase but a slower rate

Question 96

loose monetary - sustainability

Answer 96

more is produced so economy is less sustainable

Question 97

loose monetary - balance of payment

Answer 97

imports will increase, exports will decrease as they are less competitve

Question 98

transmission mechanism of monetary policy

Answer 98

By changeing interest rates, the oppourtunity to increase/decrease aggregate demand
1) change in market interest rates
2) impact on demand
3) effect on output, jobs and investment
4)real GDP + inflation

Question 99

what do high interest rates do to exchange rates?

Answer 99

-lead them to appreciate

Question 100

Quantitative easing

Answer 100

This is when the Bank of England buys assets in exchange for money in order to increase money supply and get money moving around the economy during times of very low demand.

Question 101

changes in exchange rates and the effect on inflation

Answer 101

-changes in price of imports
-commondity prices

Question 102

benefits of QE

Answer 102

-works when monetary policy no longer works
-doesn’t impact government debt
-increases lending
-more disposable income, as lower interest rates
-encourages investment
-greater confidence
-avoids deflation

Question 103

eval of QE

Answer 103

• just because IR’s are low doesn’t mean people will spend
  -cheap mortages increases demand for house prices - low income earners cannot afford so no mulitiplier
  -increased inequality
  -high income earners have a low MPC but are the ones taking loans out - they invest it to increase wealth
  -banks may not lend to low income
  -private sector deby means people won’t borrow more
  -uncertain time lags
  -economy becomes too dependent on cheap money

Question 104

when is QE typically used

Answer 104

to avoid deflation

Question 105

steps of QE

Answer 105

1) credit the account of the BoE
2) buy back previous bonds
3) demand rises for bonds so the yield decreases
4) banks have more money, so they lend it out
5) banks get money back with the interest back
6) increases the base supply of money - increases consumption and investmen, leads to an increase in AD

Question 106

when the yield drops what also happens

Answer 106

other interest rates fall, leading to a multiplier effect

Question 107

demand side causes of defaltion

Answer 107

-deep fall in AD causing a persistent recession
-large negative output gap

Question 108

supply side causes of deflation

Answer 108

-improved productivity
-technologival advances
-fall in wage rates
-high export rates

Question 109

why is deflation a problem

Answer 109

-holding back on spending
-debts increase
-real cost of borrowing increases
-lower profit margins
-confidence and savings
-income distribution
-makes exports more competitive eventually.
but comes at a cost as unemployment will be high in ST

Question 110

quantitative tightening

Answer 110

-selling gov bonds or the central bank letting bonds mature and then removing them from the balance sheet
-when banks buy bonds, this reduces money from finacial markets and might limit the value of bank lending
-if the bank is no longer acting as a purchaser of new issues of bonds this fall and might cause bond prices to drop
-yields on government bonds from will be higher. Consequently other market interest rates might rise to
-higher loan costs in theory or lower demand for credit in the financial system.

Question 111

Eval of QT

Answer 111

-only a small fraction of bonds purchased during the decade of QE were involved
-Bank of England will use with caution if they remove liquidity quickly erratic movement in market will happen
-move space rates of interest away from the zero bound people spend over save

Question 112

Role of the bank of england

Answer 112

-Monetary policy is controlled by the Bank of England rather than the government. The Monetary Policy Committee (MPC) makes the most important decisions,
including the Bank of England base rate and the actions over quantitative easing.
-Their main aim is keep inflation at 2% and if it goes below 1% or above 3% the governor of the Bank of England has to write a letter to the Chancellor of the
Exchequer explaining why this is happened and what the Bank of England is doing to bring it back to the target. They use CPI in order to see whether this target has been
met.
-The Committee is made up of nine people: five are from of the Bank of England, including the Governor of the Bank of England, and the other four are independent
outside experts, mainly economists.

Question 113

Since 2009 the MPC..

Answer 113

has kept the bank rate at 0.5% and policy has become
focussed on boosting economic growth and employment. It was reduced to 0.25% following the Brexit vote but rose again in November 2017 due to the inflation that the
weak pound brought about. They plan to raise the interest rate once the negative output gap has been eliminated and the economy is growing strongly.

Question 114

The great depression

Answer 114

The Great Depression was set off by the Wall Street Crash of 1929 when there was a sharp fall in share prices on the New York Stock Exchange.

Question 115

Causes of the great depression

Answer 115

-loss of consumer and business confidence - shareholders lost money in the crash, others became worried about what would happen, and firms cut back investment which led to a downward spiral in
AD.
-US banking system - Banks had lent too
much during the 1920s, which had created an unsustainable boom and the system was unable to deal with issues following the crash. The government allowed banks to fail after the crash, which decreased confidence further and reduced loans to businesses and consumers, causing a fall in AD.

Question 116

Policy response in UK (GD)

Answer 116

-The UK government believed that balancing the government budget was key to recovery and that borrowing money would prevent the private sector from doing so. They 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.
-The pound came under attack from speculators and needed to be defended to prevent the UK being forced out of the gold standard. A balanced budget meant the
UK didn’t have to borrow from abroad, which helped the exchange rate as did the high interest rates used to defend the high exchange rate. However, the high
interest rates also decreased demand.
-The UK was forced to leave the gold standard on 21st September 1931 due to continued speculation against it. This caused the value of the pound to fall by 25%
compared to other currencies and allowed the Bank of England to cut interest rates by 2.5%, both of which helped the increase AD by increasing exports or increasing consumption/investment.
-There was recovery in London and the South East but Wales, the north and Scotland did not reach full employment until 1941.

Question 117

Policy response in the USA (GD)

Answer 117

-The US government originally had the same view over a balanced budget as the UK.
-However, Franklin Roosevelt was elected in 1932 with his New Deal which promised public sector investment, work schemes for the unemployed and fiscal stimulus.
-The USA reached full employment in 1943 (two years after joining the war- the same as Britain). Roosevelt’s New Deal is an example of Keynesian expansionary fiscal
policy but can be argued it was not large enough to be successful, although it did have a large impact as the US unemployment figure was so high.

Question 118

Global finacial crisis 2008

Answer 118

There are many parallels between the Great Depression and the Global Financial Crisis: both were started in the US and spread throughout the world and both had large, long term effects on the economy. However, the Global Financial Crisis was much less severe than the
Great Depression.

Question 119

Causes of the global finacial crisis

Answer 119

-mortage lending in the USA
-banks had been grouping ‘prime’ mortgages (people who were likely to pay back their loans) and ‘sub-prime’ mortgages (those who weren’t) and selling packages to other banks and investors as if they were all prime mortgages.
-there was a fall in confidence and banks stopped lending
between each other, fearing that they would lose money if the other bank were to collapse.

Question 120

Policy response of UK and USA

Answer 120

-Both governments were forced to nationalise banks and building societies and guarantee savers their money in order to prevent the chaos of a collapsed banking
system. For example, the British government bought Northern Rock and most of Royal Bank of Scotland and Lloyds Bank.
-They used expansionary monetary policies with record low interest rates and quantitative easing. The Bank of England said the QE led to lower unemployment and higher growth than would otherwise have been the case
-However, the USA government had a more expansionary fiscal policy and this is perhaps why it recovered faster. In 2010, the UK prioritised reducing National Debt over providing a fiscal stimulus, but the USA did not make this decision until 2013.