2.6 Macro objectives and policies

Question 1

What are the four main macroeconomic objectives of the government?

Answer 1

• Economic growth
• Low unemployment
• Low and stable rate of inflation
• Balance of payments equilibrium on current account

Question 2

What is the long run trend of economic growth in the UK?

Answer 2

About 2.5%

Question 3

What unemployment rate do governments aim for in the UK?

Answer 3

Around 3%

Question 4

What is the aim of protecting the environment as a macroeconomic objective?

Answer 4

To provide long run environmental stability

Question 5

What does greater income equality aim to do?

Answer 5

Distribute income and wealth equitably

Question 6

What are demand-side policies designed to do?

Answer 6

Increase consumer demand

Question 7

What is the distinction between monetary and fiscal policy?

Answer 7

• Monetary policy: control money flow via interest rates and quantitative easing
• Fiscal policy: use government spending and taxation to influence AD

Question 8

What instruments does monetary policy use?

Answer 8

• Interest rates
• Quantitative easing (QE)

Question 9

How does the Monetary Policy Committee (MPC) control interest rates?

Answer 9

They meet each month to discuss the rate of interest

Question 10

What happens when the base rate is reduced?

Answer 10

AD increases through various transmission mechanisms

Question 11

What is Quantitative Easing (QE)?

Answer 11

A method to pump money directly into the economy by buying assets like government bonds

Question 12

What are some limitations of monetary policy?

Answer 12

• Banks may not pass the base rate onto consumers
• Consumers may be unable to borrow
• Low consumer confidence affects spending

Question 13

What is expansionary fiscal policy?

Answer 13

Increases AD by increasing spending or reducing taxes

Question 14

What is deflationary fiscal policy?

Answer 14

Decreases AD by cutting spending or raising taxes

Question 15

What is a budget deficit?

Answer 15

When expenditure exceeds tax receipts in a financial year

Question 16

What are direct taxes?

Answer 16

Taxes imposed on income, paid directly to the government

Question 17

What are indirect taxes?

Answer 17

Taxes imposed on expenditure, increasing production costs for producers

Question 18

What are some limitations of fiscal policy?

Answer 18

• Imperfect information about the economy
• Significant time lag in effect
• Crowding out due to government borrowing

Question 19

What initiated the Great Depression?

Answer 19

The Wall Street Crash of 1929

Question 20

What was the unemployment rate during the Great Depression?

Answer 20

25%

Question 21

What was a key response of the UK government during the Great Depression?

Answer 21

Cutting public sector wages and raising income tax

Question 22

What are the main factors that caused the Global Financial Crisis of 2008?

Answer 22

High asset prices, risky bank loans, and defaults on subprime mortgages

Question 23

What do supply-side policies aim to improve?

Answer 23

The long run productive potential of the economy

Question 24

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

Answer 24

• Market-based: Limit government intervention
• Interventionist: Rely on government intervention

Question 25

What is a strength of supply-side policies?

Answer 25

They can directly improve the labor market through education and training

Question 26

What are some weaknesses of supply-side policies?

Answer 26

* Significant time lags * Potential for increased inequality * Policies may impact AD before AS

Question 27

What is a potential conflict between economic growth and inflation?

Answer 27

Economic growth may lead to higher inflation rates

Question 28

What is the relationship between microeconomic issues and macroeconomic objectives?

Answer 28

Microeconomic issues must be addressed for macroeconomic objectives to be met. ## Footnote Policies aimed at solving under-performing monopolies can improve macroeconomic performance.

Question 29

What is a potential conflict between economic growth and inflation?

Answer 29

A growing economy can lead to inflationary pressures when AD increases faster than AS. ## Footnote This is especially true during a positive output gap.

Question 30

How does economic growth affect the current account?

Answer 30

Economic growth can worsen the current account deficit due to increased consumer spending on imports. ## Footnote The UK has a high marginal propensity to import.

Question 31

What is the relationship between economic growth and government budget deficit?

Answer 31

Reducing the budget deficit requires less expenditure and more tax revenue, potentially lowering AD and economic growth. ## Footnote Less AD can lead to reduced economic activity.

Question 32

What are the environmental consequences of high economic growth?

Answer 32

High economic growth can lead to negative externalities such as pollution and depletion of non-renewable resources. ## Footnote Increased manufacturing is associated with higher carbon emissions.

Question 33

What is the trade-off between unemployment and inflation in the short run?

Answer 33

There is a trade-off illustrated by the Phillips curve, where lower unemployment can lead to higher inflation. ## Footnote Economic growth creates jobs, which increases wages and consumer spending.

Question 34

How can supply side policies affect the unemployment-inflation trade-off?

Answer 34

Supply side policies can reduce structural unemployment without increasing average wages. ## Footnote This can limit the trade-off between unemployment and inflation.

Question 35

What are potential conflicts and trade-offs in macroeconomic policies?

Answer 35

One policy's larger impact can conflict with or reduce the effectiveness of another policy. ## Footnote Unintended consequences are common in policy implementation.

Question 36

How can 'green taxes' impact competitiveness?

Answer 36

Green taxes can compromise the competitiveness of domestic firms by limiting production. ## Footnote Examples include carbon taxes and minimum prices on pollution permits.

Question 37

What is the relationship between fiscal policy and monetary policy?

Answer 37

Expansionary fiscal policies can lead to more government borrowing, potentially increasing interest rates and inflation. ## Footnote This can create tension between fiscal and monetary policy objectives.

Question 38

How can low interest rates affect income distribution?

Answer 38

Low interest rates can negatively impact income distribution by providing small returns to savers. ## Footnote This can exacerbate inequality in wealth distribution.