2.6 - Macroeconomic objectives and policies Flashcards
Theme 2: The UK economy – performance and policies (55 cards)
What are the main macroeconomic objectives of a government?
Economic growth
Low unemployment
Low and stable inflation
Balance of payments equilibrium on the current account
Balanced government budget
Protection of the environment
Greater income equality
What is the government’s target inflation rate? And at what point does the Governor of the Bank of England write a letter to the Chancellor of the Exchequer?
2% and if the target falls 1% outside target
Why is the balance of payments in equilibrium important for the current account?
So the country can sustainably finance the current account, which is important for long term growth.
Why does the government want to keep control of state borrowing?
So the national debt does not escalate. This allows governments to borrow cheaply in the future should they need to and makes repayment easier.
What is monetary policy, and how does it achieve its aims? Who controls it?
Used by the government to control the money flow of the economy. Through controlling interest rates and quantitative easing. It is controlled by the Bank of England.
What is fiscal policy, and how does it achieve its aims? Who controls it?
Uses government spending and revenues from taxation to influence AD. This is conducted by the government.
How do interest rates affect aggregate demand?
As they alter the cost of borrowing and the reward for saving. The bank controls the base rate, which controls interest rates. A reduction in the base rate will lead to a rise in AD.
How does quantitative easing affect an economy, and when is it used?
It increases the money flow, which in theory encourages more investment, more spending and hopefully higher growth. It is used when inflation is low and it is not possible to lower interest rates further.
3 Limitations of monetary policy
Banks might not pass on the base rates to consumers.
Banks might be more risk averse, so they don’t want to lend.
Most only work when consumer and firm confidence is high.
What is the biggest source of tax revenue for the government in the UK?
Income tax
What 3 things does the UK spend most of the budget on?
Pensions and welfare benefits
Health
Education
Expansionary fiscal policy
Aims to increase AD. Governments increase spending or reduce taxes. Leads to worsening of the government budget deficit; governments might have to borrow more.
Deflationary fiscal policy
Aims to decrease AD. The government cuts spending or raises taxes, which reduces consumer spending. Improvement of government budget.
Budget deficit
Government spending exceeds tax revenue.
Budget surplus
Government tax revenue exceeds spending.
Direct taxes
Imposed on income or profits (e.g., income tax).
Indirect taxes
Imposed on spending (e.g., VAT).
How were demand-side policies used during the Great Depression and the 2008 Global Financial Crisis?
Great Depression: Initially tight policy, later Keynesian stimulus
2008: Stimulus packages, low interest rates, QE used in the US and UK
What are some strengths and weaknesses of demand-side policies?
Strengths: Effective during recessions, quick to boost AD
Weaknesses: Can cause inflation, time lags, can increase government debt
What are the 2 types of supply-side policies?
Market based polices
Interventionist policies
Market based policies
Reduce government intervention and increase efficiency
Interventionist policies
Direct government involvement to correct market failure
How do market based policies work to increase incentives?
Lower income/corporation tax
How do market based policies work to promote competition?
Deregulation