2.6 Macroeconomic Objectives & Policies

What is economic growth?

Economic growth is a key macro-economic objective which is usually measured by calculating the percentage change in real GDP over time

Define the term unemployment rate

The unemployment rate is the percentage of the labour force that is out of work but actively seeking employment

What is the UK's target rate of inflation?

The UK's target rate of inflation is 2% using the Consumer Price Index (CPI)

True or False?

A current account surplus occurs when the value of imports exceeds the value of exports

False

A current account surplus occurs when the value of exports exceeds the value of imports

What does a balanced government budget mean?

A balanced government budget is when the government's taxation revenue equals the government's expenditure over one year

What does CPI stand for?

CPI stands for Consumer Price Index

Give the definition of balance of payments

The balance of payments is a record of all the financial transactions between a country and the rest of the world

What is the UK's environmental target for emissions reduction by 2035?

The UK's environmental target is to reduce emissions by 78% by 2035 compared to 1990 levels

True or False?

The UK government aims to run a budget deficit.

False.

The UK government aims to run a balanced budget

At what point does an economy reach full employment?

An economy reaches full employment when it is only experiencing frictional unemployment

How are government budgets affected by economic growth?

Government budgets are affected positively by economic growth, by increasing tax revenue

What are demand-side policies?

Demand-side policies are those that aim to shift the aggregate demand curve in an economy

Define fiscal policy

Fiscal policy is the use of government spending and taxation to influence the aggregate demand (AD) and long-run aggregate supply (LRAS) in an economy

What is monetary policy?

Monetary policy is used by the central bank of an economy to adjust the base rate of interest and the money supply to influence aggregate demand (AD)

Who is responsible for setting monetary policy in the UK?

The Bank of England

What is quantitative easing (QE)?

Quantitative easing is when the central bank creates new money and uses it to purchase assets in the open market. This increases the money supply in the economy

True or False?

Expansionary monetary policy shifts the aggregate demand curve to the left

False.

Expansionary monetary policy shifts the aggregate demand curve to the right

What is the key macro-economic target of the Monetary Policy Committee?

The key macro-economic target of the Monetary Policy Committee is to control inflation by targeting the CPI rate at 2%.

What are direct taxes?

Direct taxes are imposed on individuals or firms on their income, wealth and profits

What are indirect taxes?

Indirect taxes are imposed on goods and services. The producer is responsible for sending the tax payments to the government

How many times does the Monetary Policy Committee meet each year?

The Monetary Policy Committee meets 8 times a year (or every 6 weeks) to set monetary policy

What makes monetary policy effective?

Monetary policy is effective because the Bank of England operates independently from the government

What is a weakness of fiscal policy?

A weakness of fiscal policy is that policies can alter significantly when governments change

What are supply-side policies?

Supply-side policies are those that aim to shift the long-run aggregate supply (LRAS

What are supply-side interventionist policies?

Supply-side interventionist policies require government intervention to increase the potential real national output

What are market-based supply-side policies?

Market-based supply-side policies aim to remove distortions in the free market that hinder improvements in the long-run productive potential of the economy

What is the overall aim of supply-side policies?

The overall aim of supply-side policies is to increase the quantity, quality or both of the factors of production

True or False?

Privatisation is an interventionist supply-side policy.

False.

Privatisation is a market-based supply-side policy

Suggest an example of a market-based approach to increase incentives

A market-based approach to increasing incentives is reducing the rates of income tax and corporation tax

How can the government improve the skills and quality of the labour force?

The government can improve the skills and quality of the labour force by increasing spending on education and re-training

Suggest an interventionist approach to promoting competition.

An interventionist approach to promoting competition is increasing government spending on research and development grants to generate more innovation

What does privatisation mean?

Privatisation is the transfer of ownership of a business, enterprise, industry or service from the public sector to the private sector

What is deregulation?

Deregulation is the reduction or elimination of government control in a particular industry

How do successful supply-side policies affect the long-run aggregate supply curve?

Successful supply-side policies increase the long-run aggregate supply curve by shifting it to the right

What is a weakness of supply-side policies?

They are expensive to implement

In macro-economic objectives, what does the term trade-off mean?

A trade-off is when pursuing one macroeconomic objective the advancement of another may have to be sacrificed

How does economic growth affect inflation?

Economic growth can lead to higher inflation as prices for remaining scarce resources are bid up

What is a trade-off between economic growth and environmental sustainability?

A trade-off between economic growth and environmental sustainability is that growth often increases pollution and depletes non-renewable resources

What does the short-run Phillips curve show?

The short-run Phillips curve shows that there might be a trade-off between unemployment and inflation.

True or False?

Rising inflation is accompanied by rising unemployment.

False.

Rising inflation is accompanied by falling unemployment, according to the short-run Phillips Curve

How does economic growth affect income inequality?

Economic growth can increase income inequality as profits for the owners of factors of production often outpace wage increases

What is a trade-off between economic growth and balancing the current account?

A trade-off is that economic growth usually leads to higher incomes and increases in spending on imports. This worsens the current account balance

How does raising interest rates affect supply-side investment?

Raising interest rates slows down supply-side investment by raising the cost of borrowing for firms

What is a conflict between expansionary fiscal policy and short-run aggregate supply?

Expansionary fiscal policy may cause a shortage in short-run aggregate supply as government spending causes excess demand, leading to inflation

How can environmental policies affect the long-run aggregate supply curve (LRAS)?

ncreased environmental policies may lead to a fall in economic growth and a lower long-run aggregate supply. This will shift the curve to the left

What is a trade-off between low unemployment and low inflation?

A trade-off is that as an economy moves closer to its productive potential, wage inflation increases, leading to rising inflation

True or False?

Demand-side and supply-side policies are always in conflict

False.

Governments and central banks use a combination of demand-side and supply-side policies to address economic issues