2.6 Macroeconomic Objectives and Policies

Question 2

What are the four main macroeconomic objectives of the UK government?

Answer 2

• Economic growth
• Low unemployment
• Low and stable rate of inflation
• Current account equilibrium

Question 3

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

Answer 3

About 2.5%

Question 4

What unemployment rate do governments aim for in the UK?

Answer 4

Around 3%

Question 5

What is the UK government’s inflation target measured with?

Answer 5

CPI (Consumer Price Index)

Question 6

What happens if the inflation rate falls 1% outside the target?

Answer 6

The Governor of the Bank of England must write a letter to the Chancellor of the Exchequer explaining why and what will be done

Question 7

What does a balance of payments equilibrium on the current account imply?

Answer 7

The country can sustainably finance the current account

Question 8

What is the purpose of a balanced government budget?

Answer 8

To control state borrowing and prevent escalation of national debt

Question 9

What is one objective related to environmental protection?

Answer 9

To ensure resources are used sustainably

Question 10

What do greater income equality objectives aim for?

Answer 10

Equitable distribution of income and wealth

Question 11

What are demand-side policies designed to do?

Answer 11

Increase consumer demand to boost total production

Question 12

What is the distinction between monetary and fiscal policy?

Answer 12

• Monetary policy: controls money flow via interest rates
• Fiscal policy: uses government spending and taxation to influence AD

Question 13

What instruments are used in monetary policy?

Answer 13

• Interest rates
• Quantitative easing (QE)

Question 14

What role does the Monetary Policy Committee (MPC) play?

Answer 14

They alter interest rates to control the money supply

Question 15

What happens to aggregate demand (AD) when the base rate is reduced?

Answer 15

AD increases

Question 16

What is Quantitative Easing (QE)?

Answer 16

A method to stimulate the economy by increasing the money supply through asset purchases

Question 17

What can the Bank of England do if inflation becomes high after QE?

Answer 17

Sell assets to reduce the money supply

Question 18

What are two limitations of monetary policy?

Answer 18

• Commercial banks may not fully pass on changes in the base interest rate to consumers and firms.
• Low interest rates may not stimulate borrowing if consumers and businesses lack confidence or access to credit

Question 19

What is expansionary fiscal policy?

Answer 19

Increasing AD by raising government spending or cutting taxes

Question 20

What is deflationary fiscal policy?

Answer 20

Decreasing AD by cutting government spending or raising taxes

Question 21

What is a budget deficit?

Answer 21

When government expenditure exceeds tax revenue

Question 22

What are direct taxes?

Answer 22

Taxes imposed on income paid directly to the government

Question 23

What are indirect taxes?

Answer 23

Taxes imposed on expenditure that increase production costs

Question 24

What is one limitation of fiscal policy?

Answer 24

Governments may have imperfect information leading to inefficient spending

Question 25

What initiated the Great Depression?

Answer 25

The Wall Street Crash of 1929

Question 26

What was one response of the UK government during the Great Depression?

Answer 26

Cutting public sector wages and raising income tax

Question 27

What was a key policy response in the USA during the Great Depression?

Answer 27

Roosevelt's New Deal, which included public sector investment and fiscal stimulus

Question 28

What refers to the decline in world GDP in 2008-2009?

Answer 28

The Global Financial Crisis or The Great Recession

Question 29

What were two causes of the Global Financial Crisis?

Answer 29

* Excessive risk-taking and poor regulation: Banks made risky loans and invested heavily in complex financial products without sufficient oversight. * Subprime mortgage collapse: Lenders gave mortgages to high-risk borrowers, leading to widespread defaults and a crash in housing markets.

Question 30

What was a policy response in the UK during the Global Financial Crisis?

Answer 30

Nationalisation of banks and building societies

Question 31

What are supply-side policies aimed at?

Answer 31

Improving the long run productive potential of the economy

Question 32

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

Answer 32

* Market-based: limits government intervention * Interventionist: relies on government intervention

Question 33

What is a potential strength of supply-side policies?

Answer 33

They can address structural unemployment through education and training

Question 34

What is a potential weakness of supply-side policies?

Answer 34

They have significant time lags and may not always succeed

Question 35

What is the effect of supply-side policies on the AD/AS diagrams?

Answer 35

The LRAS curve shifts to the right, increasing productive potential

Question 36

What can happen if there is a lot of spare capacity in the economy?

Answer 36

Supply-side policies may have no impact

Question 37

What happens if the economy is producing on the elastic part of the curve following a policy change?

Answer 37

There will be no change in output following the policy. ## Footnote This indicates that the economy is not responsive to policy changes at this point.

Question 38

What is the relationship between microeconomic issues and macroeconomic objectives?

Answer 38

Microeconomic issues, like under-performing monopolies, must be addressed to meet macroeconomic objectives. ## Footnote If microeconomic performance is poor, macroeconomic goals cannot be achieved.

Question 39

What is a potential conflict between economic growth and inflation?

Answer 39

A growing economy is likely to experience inflationary pressures when there is a positive output gap. ## Footnote This occurs when aggregate demand increases faster than aggregate supply.

Question 40

How does economic growth affect the current account in the UK?

Answer 40

Economic growth leads to higher consumer spending, worsening the current account deficit due to high marginal propensity to import. ## Footnote Conversely, export-led growth can result in a current account surplus.

Question 41

What is the trade-off between economic growth and the government budget deficit?

Answer 41

Reducing a budget deficit requires less expenditure and more tax revenue, which can lead to a fall in aggregate demand and economic growth. ## Footnote This suggests a delicate balance between fiscal responsibility and economic expansion.

Question 42

How does economic growth impact the environment?

Answer 42

High economic growth can result in negative externalities, such as pollution and increased usage of non-renewable resources. ## Footnote This is due to more manufacturing activities associated with growth.

Question 43

What is the relationship between unemployment and inflation in the short run?

Answer 43

There is a trade-off illustrated by the Phillips curve; as economic growth increases, unemployment falls, leading potentially to higher inflation. ## Footnote Increased jobs can result in higher wages, boosting consumer spending.

Question 44

What can limit the trade-off between unemployment and inflation?

Answer 44

Supply side policies can reduce structural unemployment without increasing average wages. ## Footnote This can help stabilize the economy without fueling inflation.

Question 45

What are potential conflicts between macroeconomic policies?

Answer 45

One policy may have a larger impact that conflicts with another, leading to unintended consequences. ## Footnote Examples include environmental policies affecting competitiveness or fiscal policies impacting monetary policy.

Question 46

What is a potential conflict between environmental policies and competitiveness?

Answer 46

Implementing green taxes or minimum prices on pollution permits can compromise the competitiveness of domestic firms. ## Footnote This is because such policies limit production capabilities.

Question 47

What effect can expansionary fiscal policy have on monetary policy?

Answer 47

Expansionary fiscal policies can lead to increased government borrowing, which may cause interest rates and inflation to rise. ## Footnote This creates a potential conflict between fiscal and monetary policy objectives.

Question 48

How can low interest rates affect income distribution?

Answer 48

Low interest rates can negatively impact savers by providing a small return on their savings, affecting income inequality. ## Footnote This highlights the broader implications of interest rate policies.

Question 49

What is a potential adverse effect of microeconomic policies on macroeconomic performance?

Answer 49

Indirect taxes intended to fix market failures could reduce competitiveness and decrease short-run aggregate supply. ## Footnote This illustrates the interconnectedness of micro and macroeconomic policies.