2.6 Macroeconomic Objectives and Policies

Question 1

7 Main Macroeconomic Objectives

Answer 1

• Economic Growth, around 2.5%
• Low Unemployment , around 2%
• Low and stable inflation, the goal is 2%
• Balance of payments equilibrium on the current account
• Balance of government budget
• Protection of the environment
• Greater income equality

Question 2

Monetary Policy

Answer 2

This is where interest rates and quantitative easing is used to control inflation

Question 3

Fiscal Policy

Answer 3

This is where government spending and taxation is used to control inflation

Question 4

Interest Rate

Answer 4

The price of money

Question 5

The MPC

Answer 5

The monetary policy committee changes interest rates to control inflation

Question 6

What is the Base Rate

Answer 6

The interest rate that a central bank – such as the Bank of England – will charge commercial banks for loans

Question 7

Quantitative Easing

Answer 7

When a central bank purchases government bonds from commercial banks

Used when inflation rates are low and it is not possible to lower interest rates

Question 8

Low interest rates meaning on inflation

Answer 8

Inflation would increases because the amount of demand for money for borrowing will increase

Question 9

The effect of a lower base rate on aggregate demand

Answer 9

A lower base rate means that AD will rise
- Consumption and Investment increase because the cost of borrowing decreases
- High consumption due to lower borrowing
- Savings are less attractive#
- Reduces incentives for the investors to hold money in British banks. Weaker pound means exports cheaper and imports dearer

Question 10

Limitations of Monetary Policy

Answer 10

• Banks may not pass on the base rate onto consumers. This would means that the effect of the base rate on commercial banks is nothing and wont cause inflation to fall
• Even if the cost of borrowing is low, commercial banks may still be unwilling to lend money
• It would depend on consumer and producer confidence. Even is the interest rates are low, consumer and producers still might not borrow

Question 11

Why is High inflation bad

Answer 11

High inflation is bad because it reduces purchasing power, leading to a decline in the real value of money and potentially making it harder for individuals and businesses to afford essential goods and services.

Question 12

Why is Low inflation bad

Answer 12

• Firms are rewarded less from producing a good and can result in a fall in confidence within the economy
• Deflation can discourage spending and investment as consumers anticipate further price drops.
• This can lead to reduced economic activity,
• Unemployment rising

Question 13

Expansionary Fiscal Policy

Answer 13

Government increases spending or reduces taxes to increase aggregate demand and stimulate growth

Worsens the budget deficit

Question 14

Contractionary Fiscal Policy

Answer 14

Government decreases spending and increases taxation to reduce AD.

Improves the budget deficit

Question 15

Budget Deficit

Answer 15

When government expenditure exceeds tax receipts

Question 16

Budget Surplus

Answer 16

When tax receipts exceed expenditure

Question 17

Limitations of Fiscal Policy

Answer 17

• Government may have imperfect information
• Fiscal policy comes with a time lag meaning that it may take a long time for it to come to affect
• If the government spends too much via expansionary fiscal policy, it could lead to the budget deficit being so great that there would be difficulties in paying back the debt

Question 18

The global financial crisis in 2008
- Demand side policies used

Answer 18

• This refers to the fall in world GDP between 2008-2009.
• Consumers defaulted on mortgages and banks lost a lot of funds

Demand Side Policies Used

UK
- Expansionary Monetary policy was used to cut interest rates and also QE was used

USA
- Expansionary Fiscal policy, cutting tax allowing them to recover faster

Question 19

The great depression
- Demand side policies used

Answer 19

Unemployment rate of 25% and real GDP falling by 30%.
Set off by the Wall Street Crash

Demand Side Policies Used

UK
- Contractionary Fiscal Policy. Taxation rose to fund the elimination of the government deficit

USA
- Programmes for unemployed to increase AD

Question 20

Supply side policies

Answer 20

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

Market based
Interventionist

Question 21

There are two types of supply side policies

Answer 21

Market based
Interventionist

Question 22

Market-Based policies and what they aim to do

Answer 22

These are policies that aim to limit government intervention.

These aim to
- Lower ta
- Reduce minimum wages and benefits
- Deregulation

Question 23

Interventionist policies and what they aim to do

Answer 23

A type of supply side policy that relies on government intervention in the market

• Gov Spending on Education/Training
• Gov Spending on Infrastructure
• Subsidies to firms to promote investment

Question 24

Evaluation on Supply Side Policy

Answer 24

• Time Lag
• Costs
• Unintended Consequences
• Information gaps

Question 25

Trade offs between Economic growth and inflation

Answer 25

Economic growth can lead to inflation where demand exceeds supply

Question 26

Trade offs between Economic growth and the current account

Answer 26

When there is high amounts of economic growth, consumers have high spending. Their MPI, marginal propensity to import increases and can worsen the current account deficit

Question 27

Unemployment vs Inflation

Answer 27

This is shown through the Philips curve. It says that as there is economic growth, jobs are created. This means that unemployment falls and the wages increase, resulting in more consumer spending and therefore inflation

Question 28

Philips Curve Axis

Answer 28

rate of inflation - y rate of unemployment - x

Question 29

Environment vs Competitiveness

Answer 29

When there is 'green taxes' it means that firms are limited within their production as cost of production rises.