2.6 macroeconomic objectives and policies - 25 markers

evaluate macroeconomic policies, apart from monetary policy, the UK government could use to reduce inflation - intro

inflation = sustained increase in PL

target = 2±1% - use as a measure to judge current inflation level

evaluate macroeconomic policies, apart from monetary policy, the UK government could use to reduce inflation - KAA1 point

contractionary fiscal policy - lower G and increase T to lower AD and therefore lower demand-pull inflation

evaluate macroeconomic policies, apart from monetary policy, the UK government could use to reduce inflation - KAA1 - first increased T analysis

increase in income tax - decrease disposable income - decrease C and therefore AD - quite a large shift as C makes up 60% of AD - fall in PL

evaluate macroeconomic policies, apart from monetary policy, the UK government could use to reduce inflation - KAA1 - first increased T diagram

evaluate macroeconomic policies, apart from monetary policy, the UK government could use to reduce inflation - KAA1 - second increased T analysis

increase corporation tax e.g. increase from 19 to 25% in 2021 - reduce retained profits for firms - reduce investment - AD shifts in

second increased T diagram

fall from Y1 to Y2

evaluate macroeconomic policies, apart from monetary policy, the UK government could use to reduce inflation - KAA1 - decreased G

e.g. lower spending on NHS - current budget is equal to 10% of UK GDP

fewer injections into circular flow - AD shifts inward - lower inflation

evaluate macroeconomic policies, apart from monetary policy, the UK government could use to reduce inflation - EV1 against increased taxation

cfp would lead to higher production costs for firms in SR - shift SRAS inwards - increase in cost-push inflation - harder to control - cannot use interest rates

evaluate macroeconomic policies, apart from monetary policy, the UK government could use to reduce inflation - EV1 against decreased G

quality of public services fall - waiting lists in NHS - worsen labour productivity - already very low - increase costs per unit - increasing production costs - worsening cost-push inflation

evaluate macroeconomic policies, apart from monetary policy, the UK government could use to reduce inflation - KAA2 point

supply side policies - aim to increase productivity and efficiency e.g. privatisation - transfer of ownership of a public service to the private sector

evaluate macroeconomic policies, apart from monetary policy, the UK government could use to reduce inflation - KAA2 analysis

should lead to more efficient outcomes as private firms act on the profit motive - incentive to reduce costs to remain competitive in the market

increase LRAS - would result in a significant reduction in the price level

evaluate macroeconomic policies, apart from monetary policy, the UK government could use to reduce inflation - KAA2 another example

reduce minimum wage costs - lower wage costs for firms - lower costs of production - outward shift of SRAS - decrease in cost-push inflation

evaluate macroeconomic policies, apart from monetary policy, the UK government could use to reduce inflation - EV2

may not be effective at reducing inflation due to the effects of LR

evaluate macroeconomic policies, apart from monetary policy, the UK government could use to reduce inflation - EV2 analysis

assuming geographical immobility of labour, may lead to emigration - labour force would decrease - fall in quantity of factors of production - LRAS shifts inwards

evaluate macroeconomic policies, apart from monetary policy, the UK government could use to reduce inflation - final judgement

most effective policy depends on the cause of inflation

recent inflation has come from supply-side shocks e.g. invasion of Ukraine

suggests measures like increasing taxes would not be effective as they focus on demand-side causes

supply-side policies may be more effective as they would increase the UK’s flexibility to grow without feeling the effects of an acceleration of the price level

evaluate the effects of the government using expansionary fiscal policy in the event that the UK economy goes into recession - intro

define recession - period where there is 2 or more consecutive quarters of negative economic growth

evaluate the effects of the government using expansionary fiscal policy in the event that the UK economy goes into recession - KAA1 point

increase in G - direct injection into the circular flow of income

evaluate the effects of the government using expansionary fiscal policy in the event that the UK economy goes into recession - KAA1 analysis

outward shift in AD - assuming AD was originally on the horizontal section (in recession), will create a large increase in real incomes - increase in employment

lead to multiplier - final value of the increase in spending will be higher than the initial injection - further outward shift of AD

evaluate the effects of the government using expansionary fiscal policy in the event that the UK economy goes into recession - KAA1 further analysis

if G was focused on infrastructure would also lead to an outwards shift in LRAS due to the economy becoming more productive - leads to growth as well as reduced inflation

evaluate the effects of the government using expansionary fiscal policy in the event that the UK economy goes into recession - EV1 point

if not targeted, ir may not lead to increases in productivity - increase in growth will be limited

evaluate the effects of the government using expansionary fiscal policy in the event that the UK economy goes into recession - EV1 analysis

e.g. increased G on the NHS would be effective as there record waiting-lists, which are stifling labour productivity

also, the effects of G are usually seen quickly but with increased infrastructure spending, this may not be the case

government spending may not be he most effective way to avoid or reduce the impacts of a recession

evaluate the effects of the government using expansionary fiscal policy in the event that the UK economy goes into recession - KAA2 point

decreased taxation - income and corporation

evaluate the effects of the government using expansionary fiscal policy in the event that the UK economy goes into recession - KAA2 analysis - decreased income tax

lower levels of disposable income - more willing to spend on goods and services - large outward shift in AD as C makes up 60% of AD

evaluate the effects of the government using expansionary fiscal policy in the event that the UK economy goes into recession - KAA2 analysis - decreased income tax, effect on firms

may be increase investment in order to meet increasing demands for goods and services as a result of the decreased income tax - further growth and employment

evaluate the effects of the government using expansionary fiscal policy in the event that the UK economy goes into recession - KAA2 analysis - decreased corporation tax

to encourage increased levels of investment may cut corporation tax e.g. reverse the increase from 19% to 25% in 2021

larger incentive to spend retained profits on capital goods - further outward shift in AD

also increase in LRAS - quality and/or quantity of fop are increasing - increase in growth

evaluate the effects of the government using expansionary fiscal policy in the event that the UK economy goes into recession - EV2 point

increase in consumption not guaranteed

evaluate the effects of the government using expansionary fiscal policy in the event that the UK economy goes into recession - EV2 analysis - consumers

confidence levels may be low e.g. after GFC, despite a cut in interest rates, saving levels increased - may not be willing to purchase more goods and services - severely limit shift in AD

evaluate the effects of the government using expansionary fiscal policy in the event that the UK economy goes into recession - EV2 analysis - firms

animal spirits - even if economic conditions suggest there should be an increase in investment (low corporation tax), firms may not be willing to invest

may be because they can see consumers have low confidence - worried they will not see an increase in C that would make their I worthwhile

evaluate the effects of the government using expansionary fiscal policy in the event that the UK economy goes into recession - final judgement

extent to which growth occurs after using expansionary fiscal policy depends on factors such as confidence

may not be viable depending on objectives of government e.g. if they were focused on decreasing national debt as efp would likely lead to increased borrowing