2.6

• What are the 8 macroeconomic objectives

  • High sustainable economic growth
  • Low inflation
  • Low unemployment
  • Balanced current account
  • Reducing budget deficit
  • Reducing inequality
  • Environment
• What are the two tools used for fiscal policy

  • Tax rate
  • Government spending
• What are the two types of tax?

  Direct and indirect
• What is direct tax levied on?

  Individuals and firms
• What is indirect tax levied on?

  Goods and services
• What are the limitations of fiscal policy?

  Trade off between macroeconomic objectives

  Time lags

  Imperfect information
• What happens during expansionary fiscal policy

  • Increased government spending
  • Decreased tax rate
• What happens during contractionary fiscal policy

  • Decrease government spending
  • Increase Tax
• What are the negatives of fiscal policy

  Increased borrowing from government increases interest rates, which decreases investment and consumption.

  Possibility of crowding out

  National debt increases
• Who controls the monetary policy?

  Central bank eg. Bank of England
• What are the 3 different types of monetary policies

  • Bank of England base rates
  • Quantitive easing
  • Exchange rate manipulation
• Explain the monetary policy when Bank of England increases base rates. (Tight)

  • Due to higher costs of borrowing from the Bank of England, retail banks increase their interest rates
  • This increases the cost of borrowing for individuals/firms from retail banks
  • This causes decreased consumption, investment and increased saving
  • Aggregate demand decreases
• What are the limitations of using monetary policy: Bank of England base rates

  • Macroeconomic objective trade offs
  • No guarantee of retail banks changing interest rates
  • No guarantee that consumers and firms will demand more credit or that credit will be available
• How does quantitive easing work?

  1. Bank of England buys government bonds from commercial banks with electronic money
  2. That increases demand for government bonds which increases price however decreases yield (Interest rates)
  3. Therefore firms are more likely to lend to firms as this would increase yields
  4. This increases Investment, Consumption which increases Aggregate demand
• What are the limitations of Quantitive easing?

  • Macroeconomic objective trade offs
  • Potentially inflationary pressures in the long term due to extra money in the economy
• What are the two types of supply side policies

  Interventionist and Market based
• What are 3 main factors which affect Long run aggregate supply

  Quality of factors of production

  Quantity of factors of production

  Productive efficiency (Decrease in long run cost of production)
• What are supply side policies designed to do?

  Increase Long run aggregate supply
• What are 3 types of interventionist policies

  • Increase spending on education/ healthcare/ training
  • Increase spending on infrastructure eg. Transport infrastructure
  • Subsidies to promote investment
• What are 3 types of market based policies

  • Tax reforms
  • Labour market reforms
  • Competition policies
• Talk about tax reforms

  Lower income tax, lower co-operate tax etc. This would increase quality of factor of production, and can increase productive efficiency
• Talk about market reforms

  Reduce minimum wage, reduce benefits, reduce trade unions power etc. This would increase productive efficiency
• Talk about competition policies

  Privatisation, deregulations and trade liberalisation etc. This would increase productive efficiency
• What are the negatives of Supply side policies

  • No guarantee
  • Costly
  • Time lags
  • Need to target Supply side policies
  • Output gaps