2.6 Microeconomic objectives and policies

• What are the key macroeconomic objectives?

  Economic growth, Low unemployment, Stable inflation, Balanced government budget, Equilibrium in the balance of payments, Protection of the environment, Greater income equality
• What is a demand-side policy?

  Any deliberate action taken by the government or monetary authorities to shift the AD curve
• What are the types of demand-side policies?

  Monetary policy, Fiscal policy
• What's a monetary policy?

  The manipulation of monetary variables in order to influence the level of AD
• What's a fiscal policy?

  The manipulation of government spending and taxation in order to influence the level of AD
• What are interest rates?

  Cost of borrowing money or the return received for saving
• What is a base interest rate?

  Interest rate that the central bank will charge commercial banks for loans
• How would interest rates be used to reduce AD?

  Increase base interest rate
• How would interest be used to increase AD?

  Reduce the base interest rate
• What is asset purchasing?

  Occurs when central bank buys government bonds or other securities in order to increase money supply in the economy
• What is quantitative easing?

  Refers to the buying of government bonds or other financial assets by the central bank as a means of increasing the money supply to stimulate the economy
• What is government expenditure?

  Refers to the spending on areas such as health, education, defence, infrastructure and welfare benefits
• What are the types of taxes?

  Direct, indirect
• What is an indirect tax?

  tax on consumption
• What is a direct tax?

  Tax on income
• How can fiscal policy reduce AD?

  Reduce government expenditure
• How can fiscal policy increase AD?

  Increase government expenditure
• What is a budget deficit?

  When the government spends more than it receives in taxation
• What does a budget deficit lead to?

  Increase in AD
• What is a budget surplus?

  When the government spends less than it receives in taxation
• What does a budget surplus lead to?

  Decrease in AD
• What are strengths to demand-side policies?

  Only way to get a country out of demand-deficient unemployment and stagnation in the short run, If the multiplier is large, they can have a significant impact on growth, If there is spare capacity, the economy can grow quickly, If used to control demand-pull inflation, they can act quickly and solve the problem
• What are weaknesses to demand-side policies?

  Expansionary demand-side policies only cause inflation in the long run, The multiplier may be so low that they have little effect, If there is no spare capacity, then supply-side policies are needed instead in order to achieve economic growth, If used to stimulate AD, the government can end up running a large budget deficit adding to national debt
• What are supply-side polices designed to do?

  Increase LRAS through measures to increase the productivity and efficiency of the economy
• How do market-based supply-side policies work?

  Through the market mechanism
• What are market-based supply-side policies related to?

  Increase incentives, Increase competition, Reduce bureaucracy/regulations
• What are interventionist supply-side policies?

  Involve government intervention in the market to overcome market failures and relate to measures that involve government expenditure designed to increase productivity
• What is an incentive?

  A measure designed to motivate workers or businesses
• What is infrastructure?

  Capital assets that are designed to help an economy efficient
• What are examples of market-based policies?

  Increased incentives for workers, Labour markets reform, Reduction in corporation taxes, Increased competition, Removing regulations that are preventing firms from growing
• What are examples of interventionist policies?

  Improving the skills and the quality of the workforce, Incentives for investment, Investment from infrastructure, Finance for business start-ups

  Investment in new technology
• What are strengths of supply-side policies?

  Economic growth can be achieved without inflationary pressures building up, Some supply-side policies help to increase productivity, Supply-side policies may be used to achieve economic growth when there is limited or no spare capacity, They are less likely to cause a conflict with other macroeconomic objectives
• What are weaknesses of supply-side policies?

  If AD is low, the supply-side policies would have no impact on real output, Interventionist policies might be very expensive, Many supply-side policies take a considerable time to work, Some supply side policies might increase income inequality
• What are trade-offs?

  Occurs when an objective is achieved only at the expense of some other objective
• What is sustainable growth?

  Growth that does not compromise the welfare of future generations
• What are different conflicts between objectives?

  Inflation and unemployment, Economic growth and projection of the environment
• What are different conflicts between macroeconomic policies?

  Fiscal policy and monetary policy, Monetary policy and supply-side policies, supply side policy and fiscal policy