2.6 introduction to macroeconomic policy

• 4 main macroeconomic objectives

  • economic growth
  • low unemployment
  • low inflation
  • balance of payments equilibrium
• what rate of unemployment does the govt aim for

  3%
• what is a budget deficit

  occurs when expenditures exceed tax revenues
• difference between govt. debt and the budget deficit

  government debt is an accumulation of budget deficits
• discretionary fiscal policy

  when the government increases their spending and manipulates taxes in order to influence the aggregate demand
• what do govt spend the most money on

  pensions and welfare payments
• biggest source of tax revenue

  income tax
• type of fiscal policy the govt implements when inflation is high

  deflationary fiscal policy
• 2 features of expansionary fiscal policy

  increase in expenditures and reduction in taxes
• describe " crowding out"

  occurs when an increase in government spending reduces the resources available for the private sector to use
• will fiscal policies have an immediate impact on the economy

  no, there is a time lag
• 3 things that monetary policy involves

  • interest rates
  • money supply
  • exchange rates
• how often do the MPC meet

  8 times a year
• what is the base rate

  interest rate set by a central bank to loan money to commercial banks
• do low interest rates saving or borrowing

  low interest rates encourage borrowing
• positive wealth effect

  occurs when people spend more because they feel richer
• how quantitative easing works

  the central bank digitally creates new money, which it then uses to buy corporate and bank bonds, so that banks are more willing to loan money to consumers to stimulate more demand in the economy
• why might changing the base rate have no effect on the economy

  banks may not choose to pass this base rate onto consumers in the form of higher interest rates
• aim of supply side polices

  to improve the long-run productive potential of the economy
• how are training and education beneficial to firms

  they improve the productivity of the workforce
• 1 benefit of privatisation

  firms now have a profit motive, and so will find ways to cut costs and improve productivity, which in turn increases output
• are supply side policies better at reducing structural or cyclical unemployment

  structural unemployment
• how will an increase in interest rates affect exchange rates

  it attracts more "hot money", thus appreciating the currency against one with a lower interest rate
• what is likely to happen to AD given an exchange rate appreciation

  exports become expensive, so AD is most likely to fall
• what does the phillips curve show

  the inverse relationship between inflation rates and the rate of unemployment
• explain why inflation rises as unemployment falls

  as the economy grows, workers have more bargaining power as firms need more of them, so workers demand higher wages which increases the prices of goods and thus the overall inflation rate
• positive output gap

  occurs when the actual level of output exceeds the potential level of output
• why does the economic growth lead to a current account deficit

  British consumers have a higher propensity to import, which eventually exceeds the level of exports during times of economic prosperity
• command economy

  when the government allocates all the scarce resources in an economy
• mixed economy

  combines the features of both a command economy and free market economy