Economics Unit 2; Macroeconomic objectives

Economics Unit 2; Macroeconomic objectives

1. Inflation at a steady rate

   • Monetary Policy (Interest Rates &/or money supply)
     • The monetary policy committee may choose to RAISE the interest rate.
       • This will make buying goods on credit more expensive, thus reducing consumption + AD
   • Fiscal Policy (Taxes &/or Government Spending)
     • Raise Income Tax
       • This would reduce the level of AD as people lose more of their income
     • Cut Government Spending
       • Less money in terms of benefits, thus less consumption. The prices of goods dos not rise a fast
   • Exchange Rates
     • As a result of the raised interest, the exchange rates would rise because of HOT MONEY (The pound being in high demand because foreign investors want to put their money in an English bank to make a high return. To do this, they must convert their money into the pound currency and as it is in high demand, its price for exchange goes up, it is HOT MONEY).
       • The pound therefore becomes stronger and SPICED. Strong Pound = Imports Cheap, Exports Dear. So Imports are cheaper

2. Low Levels of Unemployment

   • Monetary Policy (Interest Rates &/or Money Supply)
     • Reduce Interest rates so there is more consumption as its opportunity cost to savings becomes smaller + it is cheaper to obtain credit. This increases AD and so more workers are needed.
   • Fiscal Policy (Taxes and Government Spending)
     • Reduce income tax so consumers have more disposable income (increasing consumption) + providing a larger incentive to seek work
     • Increase Government Spending in terms of providing infrastructure for links to places of work, whilst also reducing benefits so people have a higher incentive to seek work.
   • Exchange Rates
     • Lowering interest rates to increase consumption means that the exchange rate falls. Weak Pound = Imports Dear, Exports Cheap.
       • Exports become more competitive. Higher demand for labour and goods.

3. Disequilibrium on the Balance of Payment

   • Monetary Policy (Interest Rates &/or Money Supply)
     • Increase interest rates to make buying goods on credit from abroad more expensive, so people spend more money on domestic goods. Also encourages firms to look abroad for exports because people at home are not spending much money.
       • The increased interest rates mean there is a stronger pound however so imports become cheaper but ultimately the credit repayments would be too high
   • Fiscal Policy (Tax and Government Spending)
     • Increasing tariffs on imported goods, i.e. increasing the tax charged on their entry so they become more expensive thus reducing the demand for imports
     • Cuts in government spending will also reduce the demand for imported goods, i.e. less benefits, less infrastructure facilitating imports
   • Exchange Rates
     • Cut the interest rates so that the pound becomes weaker as less people demand to save their money here. Weak pound = Imports Dear, Exports Cheap. Our goods become more competitive overseas

4. Economic Growth

   • An outward shift in the PPF curve as a result of supply side policies being successful. Privatisation, Incentives (via tax), Education/Training, Deregulation, Investment, Expectations, Trade Union Reform

5. Inequality in Income & Wealth

   • Monetary Policy (Interest Rates &/or Money Supply)
     • Reduce interest rates so it is cheaper for the poor to obtain credit and buy goods. The rich also receive less returns on their savings, reducing the gap between the rich and poor.
   • Fiscal Policy (Taxes and Government Spending)
     • Progressive tax system. As you earn more, you are taxed to reduce the gap between rich and poor.
     • Increase Government Spending in terms of benefits to reduce the gap between the rich and poor.