MACRO OBJECTIVES AND POLICIES

• Possible macroeconomic objectives


  • Economic growth
  • Low unemployment
  • Low and stable inflation
  • Balance of payment equilibrium on the current account
• Other macroeconomic objectives


  • Balance government budget
  • Protection of the environment
  • Greater income equality
• Demand-side policies


  Policies designed to manipulate consumer demand
• Expansionary policy


  Aimed at increasing AD to bring about growth
• Deflationary policy


  Attempts to decrease AD to control inflation
• Monetary policy


  Where the central bank or regulatory authority attempts to control the level of AD by altering base interest rates or the amount of money in the economy
• Fiscal policy


  Use of borrowing, government spending and taxation to manipulate the level of aggregate demand and improve macroeconomic performance
• Repo rate


  The rate the Bank of England will charge for short-term loans to other banks or financial institutions
• How a rise in interest rates causes a fall in AD

  1. Increases the cost of borrowing for firms and consumers

  2. Increases the attractiveness of savings

  3. Leads to a fall in asset prices and a negative wealth effect

  4. Reduces consumer and business confidence
• Problems with using interest rates to manage demand include: exchange rate effects, time lags, interest rates being too low, not all interest rates affected by Bank of England base rate, lack of confidence, and discouraging investment
• Quantitative easing


  When the Bank of England buys assets in exchange for money in order to increase money supply and get money moving around the economy during times of very low demand
• How quantitative easing increases AD

  1. Increases asset prices and creates a positive wealth effect

  2. Increases the money supply, allowing more lending and spending

  3. Lowers interest rates as banks have more reserves
• Problems with quantitative easing include risks of high inflation, only increasing demand for second-hand goods, no guarantee of higher consumption, effects on housing and inequality, and economies becoming too dependent on it
• Monetary Policy Committee (MPC)


  Makes the most important monetary policy decisions, including the Bank of England base rate and actions over quantitative easing
• The MPC aims to keep inflation at 2% and has to write to the Chancellor if it goes below 1% or above 3%
• The MPC is made up of 9 people, 5 from the Bank of England and 4 independent outside experts
• Fiscal policy


  Increasing government spending or decreasing taxes to increase aggregate demand
• Budget deficit


  When the government spends more money than they receive
• Budget surplus


  When the government receives more money than they spend
• Main UK taxes


  • Income tax
  • National insurance
  • VAT
  • Corporation tax
• Income tax rates in the UK: 20% basic rate, 40% higher rate, 45% additional rate
• VAT standard rate in the UK is 20%
• Problems with fiscal policy include: impact on LRAS, inequality and incentives, political issues, austerity constraints, and the size of the multiplier
• Fiscal and monetary policy

  Have an impact on inequality
• High taxes


  Reduce incentives
• Political issues


  The government may be unwilling to raise taxes in order to reduce demand as this may lead to them being voted out of government
• Austerity


  A period where the government needs to consider the effect of policies on the budget when undertaking expansionary fiscal policy
• Fiscal policy multiplier


  The bigger the multiplier, the bigger the impact on AD
• Classical economists argue that any demand management, whether fiscal or monetary, will have no effect on long-run output so supply side policies should be used
• Keynesians argue that the economy can be in long-run equilibrium for years
• Both fiscal and monetary policies see significant time lags between their introduction and their full effect
• The biggest issue of demand-side policies is that, in most cases, an expansionary policy is inflationary whilst a deflationary policy brings unemployment
• Monetary policy


  The government is able to increase demand without having to increase their spending, which would result in a larger fiscal deficit
• Fiscal policy


  Can have significant impacts on the supply side of the economy, for example increases in spending on education to increase AD will also increase LRAS
• Fiscal policy is more effective at targeting specific groups and reduce poverty, for example by increasing benefits it can increase AD and reduce inequality
• A range of demand-side policies should be used alongside other policies, such as supply-side policies, in order to achieve all the government's goals
• The world experienced a severe depression known as the Great Depression


  1930s
• In the UK, unemployment was over 15% and in the US it was almost 25% during the Great Depression</b>
• The areas most affected in the UK were the primary industry and the manufacturing industry which relied on exports and so were impacted by the collapse of world trade
• The Great Depression was set off by the Wall Street Crash of 1929 when there was a sharp fall in share prices on the New York Stock Exchange