2.6 Introduction to Macroeconomic

Question 1

What are the 4 main macroeconomic objectives

Answer 1

-Economic growth
-Low unemployment
-Low and stable rate of inflation
-Balance of payments equilibrium

Question 2

What are the Government’s 3 main macroeconomic objectives

Answer 2

-Balanced Gov budget
-Protection of the environment
-Greater income equality

Question 3

What is Fiscal policy

Answer 3

Use of government spending and taxation to influence the level of economic activity

Question 4

Types of fiscal policy: Expansionary
Goal:
How:
Used in :
Effect:

Answer 4

Boost economic activity
Increase Gov spending and/or reduce tax
Recession
Increases AD, lowers unemployment, may increase inflation

Question 5

Types of fiscal policy: Deflationary
Goal:
How:
Used in :
Effect:

Answer 5

Reduce inflation and overheating economy
Decease Gov spending and/or increase tax
BOOMING economy with high inflation
Reduces AD, controls inflation, increase unemployment

Question 6

Pros of Fiscal policy

Answer 6

-Direct impact on AD
-Reduce unemployment and stimulate growth
-Correct economic downturns

Question 7

Cons of Fiscal policy

Answer 7

-Time lags
-Public debt and inflation
-Reduce private investment

Question 8

What is Monetary policy

Answer 8

The use of interest rates, money supply and exchange rates by a country’s central bank to influence AD, inflation, and employment

Question 9

What are the 2 Monetary policy instruments

Answer 9

-Interest rates
-Quantitative easing

Question 10

What is quantitative easing

Answer 10

Where banks creates new money electronically to buy financial assets, mainly government bonds, from banks and other institutions. Increasing cash flows in the financial system

Question 11

Pros of monetary policy

Answer 11

-Can be changed quickly
-No political influence
-Direct impact on borrowing and saving

Question 12

Cons of monetary policy

Answer 12

-Time lags
-Less effective in deep recessions
-Relies on confidence

Question 13

What is the supply side policy

Answer 13

The aim to improve the long run productive potential of the economy

Question 14

Example of supply side policy

Answer 14

-Education + training
-Reforming tax + benefits
-Immigration
-Privatisation + deregulation
-Infrastructure development

Question 15

Pros of supply side policy

Answer 15

-Deals with structural unemployment
-Lower inflation in long term
-More competition

Question 16

Cons of supply side policy

Answer 16

-Time lag
-High cost
-Inequality
-Market failure