2.6 Macroeconomic Objectives and Policies (Unfinished)

Possible Macroeconomic Objectives (Key 4)

1. Economic growth

2. Low unemployment

3. Low and stable rate of inflation

4. Balance of payments equilibrium on current account

Extra 3 macroeconomic objectives

1. Balanced government budget

2. Protection of the environment

3. Greater income equality

Explanation of Monetary Policy Interest Rates (Demand-Side)

• Used by the government to control flow of money

• Reduction in base interest rate leads to a rise in AD

• Consumption and investment increase due to lower cost of borrowing

• Saving becomes less attractive

• Interest rates are down, so there is less incentive for investors to hold money in British banks, so demand for the £ decreased, so the £ becomes weaker, so exports are cheaper + imports are more expensive, and therefore net trade will increase

Explanation of Monetary Policy Quantitive Easing (Demand-Side)

• Has inflationary effects as there is an increase in money supply, so the value of the pound decreases

• Should increase investment, more spending and hopefully higher growth

• Limitations: Even if cost of borrowing decreases consumers may be unable to borrow because banks are unwilling to lend and if consumers think the economy is risky they are less likely to spend even with lower interest rates

Explanation of Fiscal Policy (Demand-Side)

• Expansionary fiscal policy is when the government increases spending or reduces taxation

• Limitations: Government may have imperfect information which could lead to inefficient spending and if the government spends too much, it could be hard to pay back the debt