5 Government Macroeconomic Objectives

Question 1

Macroeconomic objectives

Answer 1

Economic growth
Low unemployment
Low & stable inflation
Redistribution of income
Equilibrium in balance of payments

Question 2

Conflict between macroeconomic objectives

Answer 2

Growth VS Inflation
- High growth can cause demand-pull inflation

Low unemployment VS low inflation
- More jobs means more income leading to more spending causing higher inflation

Question 2

Fiscal policy

Answer 2

Demand-side policy that uses government spending and taxation to influence AD

Question 3

Monetary policy

Answer 3

Demand- side policy that uses money supply, exchange rate and interest rates to influence AD

Question 3

Contractionary fiscal policy

Answer 3

Used in periods of inflation, decrease AD
- Decrease in govt spending
- Increase in taxes so that there is less disposable income to spend, reducing consumption and AD

Question 4

Expansionary fiscal policy

Answer 4

Used in recession to boost AD & stimulate economic growth

Increase govt spending
- Increase in infrastructure, healthcare, education
- Direct job creation
- Jobs means higher income, more disposable income, more consumption, increase AD

Decrease tax
- Decrease tax, more disposable income, more money to spend, increase consumption, increase AD

Question 4

Contractionary monetary policy

Answer 4

Used in periods of inflation to manage AD

• Increase interest rates to decrease borrowing. Causes increase in saving and decrease in consumption + investment
• Decrease money supply leading to less liquidity and lower AD
• Increase in exchange rate to increase price of exports leading to decrease in demand for exports and increase in demand for imports, lowering net exports

Question 5

Expansionary monetary policy

Answer 5

Used in periods of recession, to increase AD & stimulate growth

• Decrease interest rate, making borrowing cheaper, increases money supply for individual to increase consumption/ investment, increases AD
• Increase money supply by lowered interest rates so more loans that individuals borrow is more money circulating in economy. Another way is quantitative easing where central bank buys govt assets/ bonds and injuects money directly into banking system
• Decrease exchange rate to decrease price of exports and increase price of imports, causing increase in demand for exports, leading to higher net export value

Question 6

Supply-side policy

Answer 6

Policy aimed at increasing the productive capacity (AS) of the economy by improving efficiency & incentives in markets

Question 7

Supply-side policy (Market based policies)

Answer 7

Aimed to reduce govt intervention & increase efficiency

Examples:
Deregulation
Privatisation
Lower income/ corportate taxes
Trade liberalisation

Question 8

Supply-side policy (Interventionist based policies)

Answer 8

Government actively supports long-term growth

• Investment in education & training
• Infrastructure development
• Subsidies in Research & Development

Question 9

Risk of expansionary fiscal policy

Answer 9

May lead to inflation if AD rises too much

Question 10

Risk of contractionary fiscal policy

Answer 10

May increase unemployment & slow growth

Question 11

Risk of expansionary monetary policy

Answer 11

May cause inflation or weaken the currency too much

Question 12

Risk of contractionary monetary policy

Answer 12

May lead to unemployment & lower growth

Question 13

Risk of supply- side policy

Answer 13

Expensive & slow to implement (time lag)
No guarantee of success
May widen income inequality (market-based policy)