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ECONOMICS THEME 2 - TOPIC 2.6 - MACROECONOMIC OBJECTIVES AND POLICIES -…
ECONOMICS THEME 2 - TOPIC 2.6 - MACROECONOMIC OBJECTIVES AND POLICIES
MACROECONOMIC OBJECTIVES
LOW AND STABLE RATE OF INFLATION
the government aim for an inflation rate of around 2%. It encourages consumers to spend money sooner and offers price stability. It also encourages foreign investment.
BALANCE OF PAYMENTS EQUILIBRIUM ON CURRENT ACCOUNT
the government aim for a stable current account e.g no large deficits
LOW UNEMPLOYMENT
the government aim to have an unemployment rate of around 5% which is close to the full employment rate
BALANCED GOVERNMENT BUDGET
government tries not to borrow lots of money as it brings in large amounts of debt. (aiming for a deficit of 2%)
ECONOMIC GROWTH
the government aim to achieve strong, sustained and stable levels of economic growth. A sustainable long term economic growth rate is around 3-4%
GREATER INCOME EQUALITY
inequality will lead to civil unrest as well as other social tensions. However, without some inequality there would be no incentive for citizens to work hard or innovate.
PROTECTION OF THE ENVIRONMENT
this is needed to prevent the depletion of scarce resources e.g oil. This could effect the living standards of the future generation. As well as this, pollution causes many health issues.
DEMAND SIDE POLICIES
MONETARY POLICY
this involves using interest rates and quantitive easing to affect AD within the economy
the main objective has been keeping inflation low and stable. However, the bank also tries to support stability of economic growth
monetary policy instruments
INTEREST RATES
set by the bank of England and mainly influenced by current inflation rates
if inflation is too high then they will raise interest rates to reduce spending and stabilise prices. and vice versa if there is negative/low growth
QUANTITIVE EASING
how it works...
2) uses money to buy government bonds from financial institutions
3) financial institutions now have more money so loans become more available
1) the bank of England creates money electronically
4) this reduces the interest rates on loans
5) increases injections into circular flow from C & I
6) this increases AD and therefore the price level
FISCAL POLICY
fiscal policy involves using taxation and government spending to influence aggregate demand within the economy.
fiscal policy instruments
GOVERNMENT SPENDING
an increase in gov spending will increase AD and may even increase LRAS
e.g spending on education won't only increase AD but will also increase the quality of labour and LRAS will increase
during times of low growth government spending will increase on things such as welfare benefits and vice versa for low growth
TAXATION
to increase AD, reduce taxes, especially income tax as this leaves consumers with more disposable income. Vice versa to decrease AD.
direct taxes
paid directly by individual or firms e.g income or corporation tax
indirect taxes
levied on goods or services instead of income or profits
two types
ad valorem (tax is % thats levied on certain products e.g VAT)
specific (tax is a fixed sum regardless of products price)
BUDGET DEFICIT
as gov spending increases, the budget is likely to worsen. However, gov spending on reducing unemployment will bring money back in through income tax.
budget deficit occurs when expenditure is greater than tax revenue
SUPPLY SIDE POLICIES
supply side policies aim to either increase the quality/quantity of the factors or improve market efficiency, increasing the economies productive potential
interventionist methods are where the government actively get involved e.g increased spending on education
market based methods try to keep the government out and let the markets act freely
POLICIES...
TO REFORM THE LABOUR MARKET
encouraging people to take jobs e.g advertisement. Also minimum wages can be raised
TO IMPROVE LABOUR SKILLS AND QUALITIES OF THE LABOUR FORCE
spending on education improves quality of labour
TO PROMOTE COMPETITION
privatisation can increase efficiency through increased competition. Also deregulation encourages new firms.
TO INCREASE INCENTIVES
reduction in income + corporation tax encourages people to enter the work force and for firms to invest the extra money in the factors of production
conflicts and trade-offs between objectives and policies
between objectives
economic growth vs balance of payments
unemployment vs inflation
firms pass on increased wage costs into increased customer costs
so as unemployment decreases, inflation increases
if there is low unemployment, firms offer high wages as workers are scarce so inflation rises
philips curve
economic growth vs environment protection
as the economy grows we use more resources and produce goods
we produce pollution and noise and destroy habitats
it can be achieved without environmental damage but growth is likely to be more expensive and slower
major growth increases demands on imports as the countries own supply can't handle demand e.g india
however, countries such as china experience growth from mass exports which gives a surplus on the balance of payments
conflict and trade-offs between policies
expansionary + deflationary fiscal + monetary
expansionary policies will increase AD but this will lead to increased inflation and possibly unbalance BOP
deflationary policies will decrease AD to improve inflation but will increase unemployment and decrease economic growth
changes in interest rates
an increase in interest rates to counter inflation will damage investment and raise the value of the pound which increases demand for imports (impacting BOP)
low interest rates promotes inequality as the poor have money in the bank whilst the rich have their money in stocks and assets, so aren't impacted
fiscal deficit
in order to reduce the fiscal deficit th government may use a contractionary fiscal policy (^taxes and less spending) will reduce AD and lead to higher unemployment
this will reduce tax revenue as output will be reduced and will affect the poor the worst out of anyone