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Week 2 The Macro Economy (Objectives of macroeconomic policy (Policy…
Week 2 The Macro Economy
Objectives of macroeconomic policy
Employment
Full employment (not entire population, but working able)
Prices
Inflation (2%)
Economic Growth
Developed Economies growing at 2% ((Target))
Balance of Payments
Current account deficit/ surplus
Policy Instruments
Fiscal Policy
Monetary Policy
Prices and incomes policy( limits on public spending, public sector pay, keeping prices down).
Exchange rate and import control (Managing exchange rate, fixed vs floating). Govs intervening in foreign currency markets (Trade wars, tariff barriers).
Fiscal Policy must link with business cycle, of busts and booms
The business cycle looks at booms and recessions, fiscal policy should be used in recession to pull economy into place of growth.
Economists want to flatten out the depth of fluctuation in the business cycle.
Raising taxes will save money for a rainy day for govs to spend in recession.
Timing and delivery of fiscal policy is an issue. If the benefit hits in a growth period the fluctuation will be greater.
Monetary policy
CB will alter rates by using open market operations
Taking money out of the economy or injecting based on if they are buying or selling.
The reserve ratio is also a way on controlling monetary flows in the economy. Using the multiplier effect
If reserve ratio is higher multiplier is lower
Monetary policy was given to BOE in 1997
Originally inflation was the only target
2013 BOE received a larger remit of economic tasks. To grow economy
QE
Result of liquidity trap
Rates why so low they CB could no longer stimulate the economy. Is this an arguemnt for higher rates and higher inflation?
The set rate of inflation is an academic exercise, which is best 2,4,6%?
Models (See lecture slide for visual)
Interventionist (short run) 1956
Instruments: Fiscal & Monetary
Objectives: Price stability external balance
Issue: Need for perfect information (none existent)
Flexible growth Targets: Theil 1956
2 ways of Gov raising money, higher taxes or borrow more
Difficult to achieve 3 targets with only 2 instruments, still requiring perfect information.
Welfare loss, try to find spot between where all 3 objectives intersect.
Satisfying objectives: Mosley 1976
Wait until target performance is unacceptable then address. Using gov intervention to correct.
New Labour monetary policy 1997.
Growing money supply in a sustainable balance with GDP.
Austerity debate 2008
Keynesian (Demand vs monetarist supply )