2.6 Macroeconomic Objectives and Policy Flashcards
(21 cards)
What are the main macroeconomic objectives of government?
Economic growth
Low unemployment
Low and stable inflation
Balance of payments equilibrium
Balanced government budget
Protection of the environment
Greater income equality
Why might governments prioritise different objectives at different times?
Economic and political circumstances change — e.g. during a recession, unemployment and growth may take priority over inflation or debt reduction.
What are demand-side policies?
Policies that influence aggregate demand — mainly through fiscal policy and monetary policy.
What is fiscal policy?
The use of government spending and taxation to influence aggregate demand and economic activity.
What is the difference between expansionary and contractionary fiscal policy?
Expansionary: Increases AD (↑ spending or ↓ tax)
Contractionary: Reduces AD (↓ spending or ↑ tax)
What is monetary policy?
The use of interest rates and the money supply to influence aggregate demand, inflation, and economic activity.
Who controls UK monetary policy?
The Monetary Policy Committee (MPC) of the Bank of England.
What is the current inflation target in the UK?
2% (measured by the Consumer Prices Index, CPI)
What happens when interest rates are cut?
Cheaper borrowing
Less incentive to save
↑ consumption and investment
→ Increases AD
What is quantitative easing (QE)?
A method of increasing the money supply by buying financial assets, such as government bonds, to encourage lending and investment.
What are strengths of demand-side policies?
Shorter time lags (especially monetary policy)
Can respond quickly to changes in AD
Effective during recession
What are weaknesses of demand-side policies?
May cause inflation
Less effective if confidence is low
Fiscal policy may increase national debt
What are supply-side policies?
Policies aimed at increasing long-run aggregate supply (LRAS) and improving the efficiency and competitiveness of markets.
What is the difference between market-based and interventionist supply-side policies?
Market-based: Reduce government intervention and allow markets to work more freely (e.g. deregulation, tax cuts).
Interventionist: Involve active government role (e.g. investment in education, infrastructure).
Examples of supply-side policies?
Tax reform
Labour market reforms
Education and training
Investment in healthcare
Infrastructure development
Promotion of competition
What are strengths of supply-side policies?
Can reduce inflation and unemployment
Increase long-run growth
Improve trade performance
What are weaknesses of supply-side policies?
Long time lags
High opportunity costs
May be ineffective if demand is low
Risk of government failure
What are common conflicts between macroeconomic objectives?
Growth vs inflation
Growth vs current account balance
Growth vs environment
Inflation vs unemployment (Phillips curve)
What does the short-run Phillips Curve show?
An inverse relationship between inflation and unemployment in the short run — reducing one may increase the other.
What are potential conflicts between policies?
Fiscal stimulus may raise debt or inflation
Supply-side policies may conflict with equality or environmental goals
Monetary policy changes can have redistributive effects
What does the acronym BETEPIID stand for in supply-side policies?
