2.6 Macroeconomic objectives and policies Flashcards
2.6.1
What are the Macroeconomic objectives
a) Economic growth
b) Low unemployment
c) Low and stable rate of inflation
d) Balance of payments equilibrium on current account
e) Balanced government budget
f) Protection of the environment
g) Greater income equality
2.6
What are the two types of policies
Demand side policys and Supply side policies
2.6.2 A)
What are the two types of demand side policies
Monetary and Fiscal
2.6.2 A)
What is Monetary policy
A demand side policy used by the Bank of England to control the flow of money in an economy.
This is done through intrest rates & quantitative easing conducted by the bank of England which is independant of the goverment
2.6.2 A)
What is Fiscal policy
A demand side policy which uses govt spending and revenue from tax to influence AD. Conducted by the govt.
2.6.2 B)
How are intrest rates used in monetary policy
BOE alters intrest rates to control the supply of money. They are seperate from the govt. IR are used to meet govt targets of price stability.
BOE controls the base rate therefore controling the IR. A v in base rate = ^ in AD this happens through many transmission mechanisms talked about in AD a few examples are :
-v IR > consumption & investment to ^ as its cheaper to borrow
-^ import prices ^ net trade
-^ asset prices ^ wealth affect
-vIR > v saving > ^ consumption & investment
2.6.2 B)
How is Quantitative easing ( asset purchases) used in montary policy
QE is a method to pump money directly into the economy which helps stimulate the economy. Since IR are low cant lower anymore the bank bought assest in the form of govt bonds using money they have created.^ cash flowing in economy encourages lending ^ investing ^ spending ^ growth
-Used by banks to help stimuate the economy when standard policy no longer effective
-may cause infection and redice value of currency
-qe is used when inflation is low & not possible to lower IR anymore
if inlfatiog get high bank reduce ss of money by selling asset
2.6.2 B)
Limitation of monmetary policy
-banks might not pass base rate onto customers if IR changes may not have intent effect
-v cost of borrowing banks may not be willing to lend
-IR will be more eff at stimulating spending and investment. when confidence is high. As when confidence is low spending
-people nay be on fixed rate mortgages / intrest rates
2.6.3)
Whats a supply side policy
policies that seek to improve long run productive potential of an economy
2.6.3)
Whats production
value of output of goods & servies measued by GDP
2.6.3)
Whats productivity
a measure of eff of production by output per input (employes, land, capital)
2.6.3)
productivty formula
total / # of workers
2.6.3)
low productivity can be caused by
low rates of investment
slow rates of innovation
2.6.3)
benifits of increased productivity
-lower cost per unit / avg cost of production
improved competitveness
higher profit
higher wwages
economic growth
productitvity improvement
2.6.3 C)
What can sucessful policy shifts lead too
right shift on LR / SR AS leading to ^ in potenital output
