Macroeconomic Objectives and Policies Flashcards
(23 cards)
What is economic growth?
An increase in national output as measured by real GDP
What are 5 common macroeconomic objectives?
- Economic growth
- Low and stable rate of inflation
- Low unemployment
- Balance of payments equilibrium on current account
- Greater income equality
What are 4 possible conflicts between macroeconomic objectives?
- Inflation and unemployment (ref to short-run Phillips curve)
- Economic growth and protective of environment
- Inflation and equilibrium on the current account of the balance of payments
- Economic growth and income equality
What does the Phillips Curve demonstrate?
The Phillips Curve is an economic model that shows the possible inverse non-linear relationship between unemployment and inflation
How might inflation and unemployment conflict? And does this trade-off exist in short-run or long-run?
To reduce the rate of inflation, one way would be to reduce aggregate demand .
But reducing aggregate demand is likely to lead to recession and cyclical unemployment.
Define income equality
When total income in the economy is shared out equally
What is a current account?
Part of the BOP account - a major component of the current account is the balance of trade
What are supply-side policies?
Policies designed to increase productivity,
competition and incentives, aiming to shift the LRAS.
What are free-market supply-side policies?
- Deregulation of product and labour markets
- Privatisation
- Reduction in taxation
- Change the levels of welfare payments
- Cutting the costs of bureaucracy for firms
What are interventionist policies?
- investment in education, training and skills
- incentives to encourage investment: tax incentive or subsidies
- infrastructure investment
- finance for business start-ups
- regional policy (aims to improve regions of low growth and low income within an economy)
What are the strengths and weaknesses of different supply-side policies?
- Targeting the root of the supply side problem (for example, is the reason behind unemployment a lack of incentive due to welfare payments or that they lack the skills required for a job?)
- Distribution of income - some market supply-side policies lead to a widening of the distribution of income, such as abolishing minimum wages and cutting welfare benefits to the unemployed
- Free market policies, left to themselves, create inefficient allocation of resources leading to lower economic growth
- Interventionist policies may lead to government failure
What is a poverty trap?
When an individual is little better off or even worse off when gaining an increase in wages because of the combined effect of increased tax and benefit withdrawal.
What are bottlenecks?
Supply-side constraints in a particular market in an economy that prevent higher growth for the whole economy
Red tape
Rules and regulations issued by government, that firms must follow to operate legally
Unemployment trap
When an individual is little better off or even worse off when getting a job because of the combined effect of increased tax and benefit withdrawal.
What is a demand-side policy
Demand-side policies aim to shift aggregate demand in an economy
What is the distinction between fiscal and monetary policy?
Fiscal policy involves the use of government spending and taxation to influence AD.
Monetary policy involves adjusting interest rates and the money supply so as to influence AD.
What are fiscal policy instruments?
Government spending (includes direct expenditure but not transfer payments which are a part of fiscal policy but not counted as government spending in the AD formula) and taxation to influence aggregate demand in the economy.
What are monetary policy instruments?
- Interest rates
- Asset purchase to increase money supply (quantitative easing)
- Changes in lending criteria
- Reserve asset (liquidity) requirements)
What is the role of central banks in the conduct of monetary policy?
- Implementation of monetary policy
- Achieving an inflation target
- As banker to the government
- As banker to the banks (lender of last resort)
What are the strengths and weaknesses of monetary policy?
Strengths:
Central banks operate independently from the Government (political process)
- Considers long-term outlook
- Targets inflation and maintains stable prices
- Depreciating the currency increases exports
Weaknesses
- Conflicting goals (economic growth puts upward pressure on inflation)
- Time lags between policy and desired impact (up to 2 years)
- Expansionary policy is less effective in negative output gaps than when used with positive
What are the strengths and weaknesses of fiscal policy?
Strengths
- Spending can be targeted on specific industries
- Short time lag as compared with monetary policy
- Redistributes income through taxation
- Reduces negative externalities through taxation
- Increased consumption of merit/public goods
- Short term government spending leads to increase in LRAS as well
Weaknesses
- Policies fluctuate significantly as governing parties change (so long-term infrastructure projects may lack follow-through)
- Increased government spending creates budget deficits
- Conflicts between objectives
What is the difference between reflationary and deflationary policies?
Reflationary - to increase AD
Deflationary - to decrease AD
