2.6 Macroeconomic objectives and policies Flashcards
(25 cards)
macroeconomic objectives (7)
economic growth
low and stable inflation
low unemployment
balanced government budget
protection of the environment
greater income equality
current account equilibrium
economic growth - macroeconomic objectives
governments aim to have sustainable economic growth in the long run - 2.5%
developing countries will aim for economic development before economic growth
low and stable inflation - macroeconomic objectives
achieve inflation rate target of 2%
helps ensure price stability for consumers and producers
low unemployment - macroeconomic objectives
aim is to have as close to full employment as possible
aim is 3% as government have to account for frictional unemployment
balanced government budget - macroeconomic objectives
ensures that government keeps control of state borrowing so that national debt does not increase
protection of the environment - macroeconomic objectives
aim to provide long run environmental sustainability
allows resources to not be exploited so future generations can use them
greater income equality - macroeconomic objectives
income should be evenly distributed through taxes so the gap between the rich and poor is not extreme
associated with a fairer society
fair current account equilibrium - macroeconomic objectives
governments aim for current accounts to be satisfactory so there is not a large deficit
imports far greater than exports
2 types of demand side policies
monetary policy
fiscal policy
monetary policy
used by the government to control the money flow within an economy
done with interest rates and quantitative easing
fiscal policy
demand side policy that involves government spending and revenue from taxation to influence AD - expansionary, deflationary
monetary policy instruments
interest rate - reward for saving and the additional percentage cost for borrowing
reduction in base rate leads to increased demand and investment as well as mortgages falling
quantitative easing - bank buys government bonds with money they created
then used to buy bonds from investors which increases cash flowing in the financial system - makes cost of borrowing lower
limitations of monetary policy (3)
banks may not pass base rate onto consumers meaning it might not have its intended effect
even if there is low cost of borrowing, banks may not be willing
consumer confidence may still be low
fiscal policy instruments
government spending and taxation - reducing taxes to increase demand
expansionary fiscal policy
aims to increase AD by decreasing taxes or increasing spending - worsens government deficit
deflationary fiscal policy
increase in taxation or cut in spending to reduce AD - improvement in budged deficit
limitations of fiscal policy
time lag
imperfect information - misallocation of resources
high interest rates may counteract fiscal policy
difficulties paying back debt if government spends too much
supply side policies
policies that aim to improve long run productive potential of an economy
market based
interventionalist
market based policies
allowing the free market to fix imbalances using supply and demand
no government interventon
interventionalist policies
supply side policies that rely on government intervention to fix imbalances
components of market based policies (3)
increase incentives - less corp tax - less benefit payments
promoting competition
reforming the labour market - abolish NMW, reducing power of trade unions
components of interventionalist policies (4)
promote competition - reducing monopoly power
reforming the labour market - subsidising relocation of workers - fill vacancies
improve skills and quality of labour force - education, training, healthcare
improving infrastructure - increases geographical mobility and facilities
limitations of supply side policies
time lags
market based policies - reduction of tax can lead to uneven distribution of wealth
negative impacts on gov budget
policies could effect AD before AS increasing upwards inflation pressures
they will have little impact if there is still spare capacity
conflicts and trade offs between objectives and policies
economic growth vs inflation
economic growth vs current account
economic growth vs environmental sustainability
economic growth vs budget deficit
unemployment vs inflation
