Questions Flashcards
To what extent do you agree that reducing budget defecit more important to macroeconomic performance than reducing the current account defecit on balance of payments?
Budget defecit explanation
BOP defecit explanation
WHY MIGHT BUDGET DEFECIT NEED TO BE REDUCED?
Adds to national debt
Possible lowering of credit rating (currently AA with S&P)
Leading to increased cost government borrowing
Future generations facing tax rises
Future spending cuts on merit/public goods
Initial government spending could be inflationary
WHY MIGHT CURRENT ACCOUNT NEED TO BE REDUCED?
Run down currency reserves
Increase in international debt (to buy foreign currencies needed to buy the excess imports)
Could cause depreciation of currency (people sell domestic currency to buy foreign currencies needed to buy imports- supply of domestic currency up)
If depreciation then:
import inflation
Rising business costs
Higher international debt (if country or business has borrowed - repayments are higher)
Loss of investor confidence - capital flight - lack of foreign investment
Could indicate structual weakness
OTHER FACTORS
An improved supply-side performance could help both, don’t necessarily have to choose policies to address one or the other
Is budget defecit cyclical or structual?
FDI could finance the capital account and also benefit budget defecit through growth and job creation inc tax revenue
How might demand and supply side shocks increase unemployment in the economy?
Define demand and supply shocks , unemployment
Explain how unemployment is measured
Explain nature of shocks as: unexpected, unanticipated or sudden
Explain that unfavourable demand-side shock reduces aggregate demand
Explain how this affects derived demand for Labour
Examples of demand side shocks and why they would cause unemployment e.g.:
Unexpected rise in interest rates causing a fall in borrowing and investment
A recession in a major trading partner causing falling export demand
Sudden decrease in the money supply - caused by fall in bank lending damaging consumption and/or investment
Explain how supply side shocks may lead to falling real GDP hence a fall in demand for Labour such as :
Sudden rise in oil price reducing real national output increasing unemployment
Explain supply side shocks may cause structual unemployment such as:
Invention of new tech where capital intensive production replaces labour intensive production
Country opens up its markets to trade - leading to cheaper imports causing deindustrialisation
How other supply shocks may cause unemployment such as:
Unexpected increases in benefit payments reducing incentive to work
Unanticipated increase in income tax rates creating disincentives to quickly move into a new job
Explain how supply side shocks may cause real-wage unemployment such as: rising trade union power, driving up wage expectations- creating a mismatch between supply and demand
Evaluate the view that the main Ecomomic objectives of UK Macroeconomic policy can be achieved without conflicting with each other
Definitions - macroeconomic objectives, trade-offs and macroeconomic policies
Explain each of the macro objectives:
Sustainable economic growth
Low, stable inflation
Low unemployment
Strong current account on BOP
Explain why Ecomomic objectives may conflict:
Rising AD and disposable income leading to worsening defecit on current account
Contractionary monetary policy designed to reduce inflation causes rising unemployment rates
Expansionary fiscal policy causing short term economic growth but leading to demand-pull inflation
Protectionist policies designed to reduce defecit on BOP could lead to retaliation and rising unemployment
Explaining supply side policies and how they can achieve macro objectives simultaneously
Considering long-run Ecomomic growth as opposed to short term and how this may impact on each objective
Philips curve - long run and short run
External factors such as difficulties of external shocks
Globalisation and impact of other nations on UK
Possible secondary objectives such as reducing inequality and poverty/environment
Consider experience of UK in periods such as the NICE decade
