Macro - Macroeconomic Objectives & Policies

Question 1

What are the four key macroeconomic objectives the government has?

Answer 1

• Economic Growth: Governments aim to have sustainable economic growth for the long run.
• Low Unemployment: Governmments aim to have as near to full employment as possible. They aim for 3% to account for frictional unemployment.
• Low and Stable Inflation: In the UK the government target is 2% which aims to provide price stability for firms and consumers which will help them make decisions in the long run.
• Balance of Payment equilibrium on the Current Account: This allows the country to sustainably finance the current account, which is important for long term growth.

Question 2

What are the other macroeconomic objectives the government has?

Answer 2

Balance government budget: This ensures the government keeps control of state borrowing, so the national debt does not escalate.
Protection of the environment: This aims to provide long run environmental
stability.
Greater income equality: This minimises the gap between the rich and poor. It is generally associated with a fairer society.

Question 3

What are demand-side policies?

Answer 3

Policies designed to manipulate consumer demand.

Question 4

What is an expansionary policy?

Answer 4

Policy aimed at increasing AD to bring about growth

Question 5

What is deflationary policy?

Answer 5

Policy aimed at decreasing AD to reduc inflation

Question 6

What is monetary policy?

Answer 6

Where the central bank or regulatory authority attempts to control the
level of AD by altering base interest rates or the amount of money in the economy.

Question 7

What is fiscal policy?

Answer 7

The use of borrowing, government spending and taxation to manipulate the
level of AD and improve macroeconomic performance.

Question 8

What is the interest rate?

Answer 8

The interest rate is the price of money - The cost of borrowing it and the reward for saving it.

Question 9

What does a rise in interest rates cause?

Answer 9

A fall in AD

Question 10

Why does a rise in interest rate cause a fall in AD? (Borrowing Costs)

Answer 10

The rise in interest rates will increase the cost of borrowing for firms and
consumers.
This will lead to a fall in investment and consumption, reducing AD.
Two particular areas of consumption that will decrease are consumer durables and
houses.

Question 11

Why does a rise in interest rate cause a fall in AD? (Savings)

Answer 11

It also makes savings more attractive, as the interest earned on them will be higher.

Question 12

Why does a rise in interest rate cause a fall in AD? (Asset prices)

Answer 12

Since less people are borrowing and more are saving, there is a fall in demand for
assets. This leads to a fall in prices for these assets. Therefore, consumers will experience a negative wealth effect since the value of their assets falls, which will lead to a fall in consumption. Moreover, investment is less attractive since firms are likely to see lower profits if prices fall. AD falls because of the fall in consumption and investment.