THEME 2 - 2.6: Macroeconomic objectives & policies

• Some microeconomic policies could have adverse macroeconomic impacts and vice versa, for example, indirect taxes to fix market failure could reduce competitiveness and decrease SRAS.
• The government has four main macroeconomic objectives to provide macro stability.
• The long run trend of economic growth in the UK is about 2.5%.
• Governments aim to have sustainable economic growth for the long run.
• In emerging markets and developing economies, governments might aim to increase economic development before economic growth, which will improve living standards, increase life expectancy and improve literacy rates.
• Governments aim to have as near to full employment as possible.
• The unemployment rate in the UK is around 3%.
• The labour force should be employed in productive work.
• The government inflation target in the UK is 2%, measured with CPI.
• This aims to provide price stability for firms and consumers, and will help them make decisions for the long run.
• If the inflation rate falls 1% outside this target, the Governor of the Bank of England has to write a letter to the Chancellor of the Exchequer to explain why this happened and what the Bank intends to do about it.
• Governments aim for the current account to be satisfactory, so there is not a large deficit.
• The government might have the following macroeconomic objectives: Balanced 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: Income and wealth should be distributed equitably, so the gap between the rich and poor is not extreme.
• Demand-side policies are policies designed to increase consumer demand, so that total production in the economy increases.
• Monetary policy is used by the government to control the money flow of the economy.
• Interest rates in the UK are controlled by the Monetary Policy Committee (MPC), which is independent from the government.
• Fiscal policy uses government spending and revenues from taxation to influence AD.
• The base rate, which controls the interest rates across the economy, is controlled by the Bank of England.
• Supply-side policies aim to improve the long run productive potential of the economy.
• To improve skills and quality of the labour force, the government could subsidise training, lowering costs for firms and improving the skills of workers.
• The Great Depression was caused by the Wall Street Crash of 1929, which led to a huge loss in consumer and business confidence, decreasing consumption and investment.
• The Global Financial Crisis, also known as The Great Recession, refers to the decline in world GDP in 2008-2009.
• Interest rates were high to help maintain the pound, which came under attack from speculators.
• The USA used more expansionary fiscal policy, and this is perhaps why it recovered faster.
• To increase incentives, market-based policies could include reducing income and corporation tax to encourage spending and investment.
• Market-based policies limit the intervention of the government and allow the free market to eliminate imbalances.
• To promote competition, market-based policies could involve deregulating or privatising the public sector, allowing firms to compete in a competitive market.
• In 2010, the UK prioritised reducing National Debt but the USA did not make this decision until 2013.
• A reduction in the base rate will lead to a rise in AD through a number of transmission mechanisms: Consumption and investment increase due to lower costs of borrowing.
• Spending more on healthcare helps improve the quality of the labour force, and contributes towards higher productivity.
• Interventionist policies rely on the government intervening in the market.
• This may help to reduce occupational immobility.
• The government thought balancing the budget was essential so they cut public sector wages and unemployment benefits and raised income tax.
• To reform the labour market, market-based policies could involve reducing the NMW or abolishing it altogether, allowing free market forces to allocate wages and the labour market should clear.
• The USA introduced protectionism whilst the UK was committed to the gold standard, where its currency was fixed to gold and was overvalued.
• The UK cut VAT from 17.5% to 15% and saw a huge increase in government borrowing.
• The 1920s had been a period of unsustainable boom and the banking system was unstable; the government allowed the banks to crash.
• Higher consumption, due to lower borrowing, will mean that asset prices increase.