Macro Objectives + Policies Flashcards
What are the 7 key macro economic objectives
- Greater Income equality
- Economics Growth
- Low Unemployment
- Low and stable rate of inflation 2%
- Balanced gov budget
- Balance of payments equalibrium on current account
- Protection of the envrionment
What are the two types of demand side policies?
Demand side = action taken by Gov / authorities to shift AD
- Monetary Policy –> manipulation on monetary variables in influence the AD e.g. bank changing interest rates
- Fiscal policy - Manipulation of gov spending + taxation to influence the AD
What are the 2 main methods of monetary policy + how are they used
intrest rates
–> cost of borrowing or reward for saving
- Inflation high - Bank raise base interest rate to ↓AD
–> ↓C, I, (X-M)
- Inflation low - bank reduce base interest rates ↑AD
–> ↑C, I, (X-M)
(multiplier effects for both)
Quantitative easing
- Central bank buys gov bonds to increase money supply
–> ↑Asset prices - ↓interest rates –> ↑Total wealth + ↓Cost of borrowing –> ↑Spending
–> ↑Money supply –> ↑Bank lending –> ↑Spending
What are the 2 main methods of fiscal policy + how r they used?
- Government expenditure –> health, education, infrastructure, welfare
- Taxation ; Direct (on incomes), indirect (on spending)
AD high
- ↓ Gov expenditure, ↑Taxation –> contractionary effect on AD + lower inflation
AD low
- ↑Gov. expenditure, ↓Taxation
Budget deficit Vs. Budget Surplus
Budget + Fiscal = same thing
- Deficit - Gov. spends more than receives –> ↑AD
- Surplus - Gov spends less than receives –> ↓AD
What were the Gov’s Fiscal + Monetary responses to 2008?
Fiscal
- cut VAT from 17.5% to 15%
- Deficit increased - 2.3% to 11.3% of GDP
Monetary
- Bank but base rate interest from 5.75% to 0.5%
–> avoided extreme measures early in crisis, meant economies suffered more than necessary
What are 4 advantages + dis to demand-side policy?
ad
- Keynesian economics, only way to relieve demand-deficit + unemployment
- If multiplier large, can have large impact
- If spare capacity, economy grow quickly
- used to control demand inflation, quickly solve problem
Dis
- Classical economics, cause inflation in LR
- Multiplier low, then little effect
- No spare capacity then Supply-side is needed
- If used to ↑AD, cause ↑budget deficit + national debt
What do Supply-side policies aim to do?
↑LRAS through ↑productivity + efficiency of economy
- Market based or interventionist
- Market –> through market mechanism; incentives, competition
- Interventionist –> Gov intervention e.g. expenditure to ↑Productivity
5 Examples of Market-based policies?
Supply-side
- ↑Incentives for Workers e.g. cut tax
- Labour Market reforms e.g. reducing trade union
- ↓Cooperation Tax - incentive to invest
- ↑Competition e.g. privatisation
- Remove regulations e.g. restrictions on mergers
5 Examples of interventionist policies?
- ↑skills + quality of workforce e.g. apprenticeships
- Incentives for investments e.g. tax breaks
- Investment in infrastructure
- Finance start-ups e.g. loans
- Investment in new tech e.g. AI
Strengths (4) + weaknesses (4) of Supply side policies?
Ad
- Economic growth without inflationary pressures
- Increase productivity
- Achieve Econ growth with limited/no spare capacity
- Less likely to cause conflict with macroeconomic objective
Dis
- If AD low, supply side have on real impact
- Interventionist policies expensive e.g. HS2
- Take time to work e.g. infrastructure or education
- Cause increased inequality e.g. lower income tax
What are the 3 conflict between Macroeconomic objectives?
- Inflation and unemployment
–> Philips curve Y inflation, X unemployment \
–> Gov ↑tax, or ↑interest rates, AD↓, firms lay off workers
–> Inflation ↓, Unemployment↑ - Economic growth and protection of environment
–> consumption can damage environment, ↑Fossil fuels –> global warming
–> need sustainable growth - Inflation and current account equilibrium
–> controlling inflation should ↑International competitiveness –> improvement of balance of payments
–> BUT, ↑interest rates to ↓Inflation can make E expensive, M cheaper
What are the 3 conflicts between the Macro policies?
- Fiscal policy and monetary policy
–> MPC (Monetary Policy Committee) think fiscal policy to loose (too much Gov. spending compared to taxation) counterbalance by ↑Interest rates
–> vis versa - Monetary policy and Supply-side policy
–> Monetary policy Demand-side
–> ↑Interest rates - ↑Cost of Production - Firms produce less - AS↓
–> ↓Interest rates - ↓Cost of production - Firms produce more - ↑AS - Supply-side policy and Fiscal policy
–> supply-side policy impacts gov spending
–> e.g. ↑Length of education to ↑Skill –> ↓Gov revenue from incomes
–> SS policies ↑budget deficit in SR, but ↓ deficit in LR
