2.6 Macroeconomic objectives

Question 1

What are demand side policies

Answer 1

Demand-side policies are policies designed to increase consumer demand, so that total production in the economy increases.

Question 2

What is the treasury

Answer 2

The treasury is the govt department responsible for developing and executing the govt public finance and economic policy.

Question 3

aim to decrease AD

Contractionary monetary policy involves…

Answer 3

Increase I.R.
Restrictions on money supply
Stronger E.R.

Question 4

How will a decrease in bank rate affect exchange rates

Answer 4

The exchange rate is likely to fall (because Capital Inflow will fall i.e.less inwards hot money).
This is likely to increase export sales – since exports are now relatively cheaper – and imports should decrease – since they are now more expensive
Investors move £ out of UK increasing supply of £

Question 5

Why is a liquidity trap a disadvantage of expansionary monetary policy

Answer 5

• I.R. have lower bound
• Even if central bank cut I.R. futher, there wont be an increase in consumer spending or investment because firms/ households are hoarding money due to pessimistic view on the future of the economy

Question 6

How does expansionary fiscal/ monetary policy leads to inflation

Answer 6

• More pressure on competition for existing FoP
• Increases price level which CoP
• Passed to consumer in form of increased prices= cost push inflation

Question 7

How can contractionary monetary policy rectify a current account deficit and what does this depend on

Answer 7

Increase I.R.
Decrease money supply so bank is less willing to loan out so I.R. increases to deter people who cant afford back
Decrease import expenditure
Drawbacks- depends on size of multiplier, conflict of low growth and high unemployment

Question 8

Why would a reduction in income tax not lead to an increase in consumer expenditure (Rational choice theory/ permanent income hypothesis)

Answer 8

Expectations amongst consumers regarding future economic conditions and the longevity of the income tax cut will also influence consumption decisions. For example, pessimism over the future of the economy or the length of time the rate cut will last will lead to lower levels of increased consumer expenditure, following a cut in the income tax rate

Question 9

Aim of supply side policies

Answer 9

Designed to increase the productive capacity of the economy, shifting LRAS to the right

Question 10

Define Market based supply side policies

Answer 10

Designed to remove anything thats prevents the free market system working efficiently.

Question 11

What are 5 free market based supply side policies

Answer 11

Deregulation, income tax, corporation tax, privatisation and trade union power

Question 12

How could supply side policies improve the balance of payments

Answer 12

If output increases (Quantity and quality of labour)
There is a decrease on inflationary pressure, this could make G+S more competitive. This may cause consumers to buy more domestic goods and cause foreigners to buy more UK goods. This may reduce imports and increase exports which leads to an improvement on the current account deficit.

Question 13

Define interventionist supply side policies

Answer 13

Designed to correct market failure

Question 14

What is meant by trade union power and how does it improve LRAS?

Answer 14

Trade union power reduces restrictions and legisalation on workers. This means that firms have more control over who they hire and fire as workers are less protected. This could incentivise productivity because of the increased risk of unemployment.
Increases quantity of labour

Question 15

What is meant by deregulation and how does it improve LRAS.

Answer 15

• The removal of restrictions
• It can increase competitivness because it removes barriers to entry for new companies to enter a market
• This could decrease P and firms are profit maximisers and so want D to increase

Question 16

What is meant by privatisation and how can it improve LRAS?

Answer 16

• When a public sector assets become privately owned
• Increases efficiency of the allocation of resources as well as waste minimisation
• However people argue NHS are publicly owned and remain the market leader for healthcare

Question 17

How might infrastructure shift LRAS outwards?

Answer 17

Increase in investments such as HS2, cross rails and broadband projects allows better transportation of goods and services as well as transporting labour more efficiently reducing geographical immobility
Reduces delays in transporting G+S

Question 18

Effect of government spending on healthcare

Answer 18

Reduces abseentism
Healthier nation
People live longer
More G+S produced

Question 19

if economy is close to full capacity…

How can increased government spending lead to crowding out

Answer 19

By borrowing money to spend on infrastructure the government is increasing demand for borrowed money, land, labour and capital
=increases price for each factor of production
=increases costs for firms more expensive for private sector= crowded out
Shifts SRAS left= decreasing real GDP
Firms may pass on higher prices to consumers= expensive goods and services

Question 20

Interventionist policy

Effects of infrastrucutre spending

Answer 20

Home building increases supply of houses due to reduced scarcity
Increases affordability of housing
Allow people to move across UK
Decreases geographical mobility
Increases mobility of labor
Increases available workers
Decreases unemployment
Increases productivity
LRAS shifts right real GDP increases, price level falls
Firms maximized profit= happy businessmen and women Consumers living conditions improved as homelessness reduced + positive wealth effect (own more stock of assets as price of houses may increase in future)

Question 21

3 marks

Explain how an increase in direct taxation may help the govt move towards its objective of greater income equality

Answer 21

Direct taxation is a tax on profit or income
Increase income tax= targetted at high income earners
Rich have less disposbale income

Question 22

Market based policy

Effects of lowering income tax

Answer 22

Consumers will receive a greater proportion of disposable income to be able to spend.
Additionally, decreaseindemand deficient unemployment, meansmore people are employed, earning a stable income.
Inactive are more likely to join labour force as they earn more
Productivity will increase as workers strive for promotions
Firms, who are profit maximisers, will invest more as they expect increased demand, given consumersMPC increases, MPI increase= accelorator effect, high animal spirits, confidence increases
long-run growth as quantityof labour increases. LRAS shifts right. PL falls= consumersare happy as goods and services are cheaper
More people employed, firms areinvesting on capital goods increasing productivity= more choice for conumers and firm increases revenues

Question 23

How does flexibility of labour improve productivity

Answer 23

• Improving the flexibility of labour to be able to adapt to changes in the demand for labour.
• Education can help this, as can incentives to retrain, and subsidies and grants to firms to engage in training.
• Labour mobility is a key component of flexibility.
• When labour is geographically immobile, government may subsidise public transport or provide re-location assistance.
• In the case of occupational immobility, improving education and skills, and providing better information to job-seekers can help.
• Reducing barriers to entry into the labour market can also help improve mobility and flexibility, such as encouraging more part-time work.

Question 24

Effect of reforming the labour market

Answer 24

Attempts to decrease unemployment to prevent a waste of resources in the market
* ↑ retirment age- ↑ workers= ↑G+S produced
* Reducing benefits- incentivises people to work and help reform labour market through schemes e.g. universal credit…
Also incentivises economically inactive to enter labour force in order to find work
This ↑ quantity of factors of prodcution, increasing size of capital stock and amount of capital per worker employment
* Reducing minimum wage law incentivises firms to fire more as it reduces CoP as there less of their retained profit are spent on wages and more can be spent on capital
This encourages workers to work harder to remain in jobs

Question 25

Disadvantages of supply side policies

Answer 25

• Time lags: lengthy time lags between SSP’s being applied and the effects becoming visible mean the identifies problem persists over an extended period.
• Govt budget deficit & national debt make it difficult to pay for large investments or offer significant grants/ tax breaks.
• Depends if there’s spare capacity

Question 26

PLLEBBGH

Macroeconomic objectives

Answer 26

Protection of the environment
Low unemployment
Low and stable rate of inflation
Economic growth
Balance of payments equilibrium on current account
Balanced government budget
Greater income equality
Happines

Question 27

Conflicts between objective of economic growth and other macroeconomic objectives

Answer 27

• Inflation rising as full capacity is approached –
  bottlenecks may arise where some restrictions in
  the supply chain cause cost and wage pressures
• Balance of payments position may deteriorate
  as incomes rise and more imports are demanded
  as UK has a high marginal propensity to import
• Growth should result in higher average living
  standards, but may not deliver a more fair or
  equitable distribution of income and wealth as
  rich tend to get rich faster than the poor do
• Increased growth tends to lead to high external
  costs / deterioration of the environment from
  congestion and pollution

Question 28

Explain why the govt has a low rate of inflation as a macroeconomic objective

Answer 28

1. To encourage long term investment by firms- increase capital spending - increase G+S produced in an economy- increases internationl competitiveness
2. Increases confidence in govt control of economy- If high PL- increase govt spending on welfare benefits - govt budget deficit (gov spending> govt revenue)
   If low PL- consumers may hold off purchases as PL may fall again = Consumption falls
3. Help reduce income inequality as inflation damages those on fixed incomes (pigou wealth effect)

Question 29

Why would quality of G/S reduce the extent of the conflict with the government’s objective of maintaining the standard of living when the balance of payments moves from a deficit to equilibrium on the current account.

Answer 29

It is also possible that the living standards within the domestic economy may be compensated for by improvements in the standard of goods produced domestically or still imported, such that despite the loss of the additional goods exported the net welfare of domestic consumers is not adversely affected.

Question 30

Philips curve

Why does the trade off between unemployment and inflation exist

Answer 30

Philips curve- as rate of unemployment decreases, the rate of inflation increases
This is beacuse a reduction in unemployment leads to a shortage of labour that encourages an increase in wages and subsequent increases in prices.

Question 31

Why might the balance of payments moving from a deficit to equilibrium on the current account lead to a fall in living standards

Answer 31

There could also be a fall in living standards as more goods are exported (or less imported) than previously, so domestic consumption could be falling as exports account for an increasingly large proportion of AD, which will lead to a further conflict in macroeconomic objectives

Question 32

Why would lower interest rates decrease income inequality

Answer 32

Lower interest rates tend to redistribute income from savers to borrowers, which would tend to improved income distribution