Chapter 16: The objectives and instruments of macroeconomic policy


A2 Economics (MACROECONOMICS) Flashcards on Chapter 16: The objectives and instruments of macroeconomic policy , created by callum_j.smith on 11/12/2014.
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Question Answer
What is a policy objective ? A target or goal that a government wishes to achieve
What is a policy instrument ? A tool, or set of tools, that a government uses to achieve one or more of the government's policy objectives.
What is a supply-side policy? Includes any policy that improves an economy's productive potential and its ability to produce.
What is monetary policy ? Involves changes in the base rate of interest to influence the growth of aggregate demand, the money supply, output, jobs and inflation.
What is fiscal policy ? Involves the use of government spending, taxation and borrowing to affect the level and the growth of aggregate demand, output and jobs.
When was monetary policy implemented and who by? Since 1997 Implemented by the UK's government agent the Bank of England
Who sets the policy objective for the Bank Of England to try and achieve? The government
What is the main depatment for supply-side policies The Department Of Business, Innovation and Skills
Who implements fiscal policy The government's finance ministry- The Treasury
What are the 5 main policy objectives in Keynesian order (with their targets) 1. Maintain full employment or low unemployment - BEVERIDGE 3% 2. Economic growth- 2.50% 3. Acceptable and fair distribution of income and wealth. 4. To control the rate of inflation and price stability - 2% + or - 5. Satisfactory balance of payments- balance over economic cycle 0%
Before the free-market counter revolution, Keynesian economists believed that economic policy should be used to achieve........ - Full employment - Economic growth - Fair distribution of income
Which two policy objectives did Keynesian economists believe to be intermediate ? - Inflation - Satisfactory balance of payments
In the early 1980s, what threatened to escalate out of control ? Inflation
In the early 1980s, which policy became priority for free-market economists? Control of inflation
In the early 1980s, which policy was downgraded to a much lower economic priority ? Full employment
What type of era did the early 1980s become? Monetarism
In the early 1980s, macroeconomic policy revolved around... Controlling the growth of the money supply in order to control inflation
Since the mid-1980s, what era died? 'Death of monetarism'
In 1993, what did Norman Lamont state about high unemployment ? High unemployment was a 'price well worth paying' for keeping inflation under control.
In 1998, under a Labour government, the governor of the Bank Of England argued that 'job losses in the north' were what? 'Job losses in the north were an acceptable price to pay for curbing inflation in the south.'
What do Free-market economists argue for in order to maintain a high and sustainable level of employment ? inflation must first be brought under control
What is a policy conflict ? Occurs when 2 policy objectives cannot both be achieved at the same time. Therefore, the better performance of achieving one causes a worse performance for the other.
What is a trade-off between policy objectives ? When two or more desirable objectives are mutually exclusive. Governments usually do a trade-off between objectives when it may be impossible to achieve two or more objectives simultaneously. *Policy conflicts solved through trade-offs*
In the UK Keynesian era, what were the 4 main conflicts between policy objectives? 1) Full employment/ economic growth & satisfactory balance of payments 2) Full employment/ economic growth & controlling inflation 3) Increasing rate of economic growth & more equal distribution of income and wealth 4) Current living standards & future living standards
Why do some free-market economists believe that achieving an equal distribution of income & wealth can make an economy less competitive and grow slower? - Reduces entrepreneurial and personal incentives
What is the ultimate objective of economic activity ? Improving economic welfare
What are the penultimate objectives 1) controlling inflation 2) macroeconomic stability 3) Competitive and efficient markets
What are the intermediate objectives? 1) money supply 2) exchange rate target
What are the 3 main policy instruments 1) Monetary Policy 2) Macro Fiscal policy 3) Micro Fiscal Policy- Supply side policy
What are the 3 main instruments of Macro fiscal policy and Micro fiscal policy? 1) Taxes 2) Government spending 3) Governments budgetary position
State one way supply-side policy is used to achieve competitive and efficient markets? Incentives
State the 2 main ways Monetary policy is used to achieve the money supply target and exchange rate target 1) Interest Rates 2) Quantitative easing
What is Beveridge's definition of full employment ? Occurring when unemployment falls to 3% of the labour force
In the 1950s and 1960s, where was UK unemployment in relation to Beveridge's target? Below 3%
According to Beveridge, full employment was achieved during which decades ? The post-war Keynesian decades
What happened to unemployment in the two recessions in early 1980s and early 1990s? Rose rapidly above the 3% target
In 1986 and 1993, what figure did unemployment peak to? over 3 million
In the 1990s and 2000s, what happened to unemployment and why? Unemployment fell as the UK recovered from a recession and entered a boom
In 2005, what happened to unemployment? Did it meet Beveridge's definition? Fell below 5%- thus meeting his definition of full employment
In 2007, unemployment was at what figure? (percentage) 2.8%
Due to the recession in 2008, what happened to unemployment? Unemployment rose again
In 2011, unemployment peaked at what level (million) and what was the unemployment rate? 2.7 million unemployed 8.4% unemployment rate
What is the free-market definition of full employment? Occurs in the economy's aggregate labour market at the market clearing real wage rate, where the number of workers willing to work equals the number of workers employers wish to hire.
Define economic growth A long-term expansion in the country's productive potential
What does the government aim to achieve in terms of economic growth (2) !) An acceptable 2) and sustainable rate of economic growth
What does economic growth usually create more of? Usually creates more jobs, thus decreasing unemployment
What do free-market economists argue for to create the supply-side conditions in which growth is best fostered? Argue that a certain level of unemployment is needed
Since Q1 of 2013, what has happened to GDP? Grown positively
What happened to the rate of GDP growth between Q3 of 2013 and Q1 of 2014 rate of GDP growth has fluctuated and fallen
What was economic growth in Q3 of 2013? 0.13%
What was economic growth in Q4 of 2013? 0.6%
What was economic growth in Q1, Q2 and Q3 of 2014 1) 0.6% 2) 0.8% 3) 0.7%
State the 7 main benefits of economic growth 1) improvements in living standards 2) More jobs 3) Accelerator effect of growth of capital investment 4) Greater business confidence 5) The fiscal 'dividend' 6) Potential environmental benefits 7) Benefits from growth driven by technological change
State 4 disadvantages of economic growth 1) High inflation risk 2) Environmental concerns 3) Lowered sustainable rate of growth 4) Income and wealth inequality
What type of judgements are made when equitable considerations are introduced into economic analysis ? Normative judgements
There is usually a policy conflict between distribution of income and ... Faster economic growth
For sustained economic growth to be achieved, free-economists argue that people must be Incentivised, which may require greater income inequality to create conditions where people - take financial risks knowing that they will enjoy the benefits rather than others
Define inflation Inflation is the persistent or continuing rise in the average price level
What type of objective is controlling inflation? Why? It is an intermediate objective - because it is a necessary condition that must be achieved to create the efficient and competitive markets required in the long run for the main policy objectives - full employment and sustained economic growth.
As a benefit, a steady but low inflation rate may be associated with what ? Climate of consumer and business optimism
Define a 'satisfactory' balance of payments Where the current account is in equilibrium, or when there is a small surplus but sustainable deficit
What is a negative of a large current account surplus? Another country suffers a trading deficit
Define budget deficit When a government's total expenditure exceeds total tax revenue. This means the government has to borrow money.
State two possible ways a government might borrow money for a budget deficit 1) Treasury Bills 2) Long-term government bonds
Define the balance of payments Records financial transactions between consumers and businesses and the government in one country with others
The BOP figures tell us what 2 things? - How much is being spent by consumers and firms on imported goods and services - How successful firms have been in exporting to other countries
What is the current account of the balance of payments The monetary value of exports and the monetary value of imports
What is a current account deficit ? When the value of imports exceeds the value of exports
What is current account equilibrium ? Occurs when the monetary value of exports equals the monetary value of imports.
In the Mid 1970s, two massive balance of payments crises were caused by what ? Huge current account deficits
To try and reduce the deficits, the government did what ? Deflate the economy - causing higher unemployment and stagnated economic growth
In recent years, what has happened to the current account deficit ? Been much larger in terms of size and ratio of UK output
Why is a large payments deficit no longer regarded as a problem ? Governments are generally prepared to allow market forces to determine the exchange rate
30-40 years ago, the government were forced to do what to support the exchange rate ? Deflate the economy
In 2006, the trade-deficit had risen to what amount ? (and % of GDP) £39.1 billion 2.9% of GDP
What is a policy indicator ? Provides the government with information about the state of the economy and or whether current policy is on course to achieve the governments objectives
Define the money supply The stock of money circulating around the economy
In the monetarist era (1970s and 1980s) the money supply was used as what 2 things? 1) A policy instrument 2) Policy objective
Under monetarist theory, governments attempted to control the rate of growth of the money supply in order to control what? Inflation
Was the money supply or inflation in the monetarist a policy instrument ? Money supply was a policy instrument
To control the rate growth of the money supply, what was used ? Interest rates
Which one is the intermediate objective, the growth of the money supply or interest rates. Growth of the money supply
After the 'death of Monetarism', what 2 things was the money supply no longer? No longer a 1) Policy objective 2) Policy instrument
What is the money supply currently used as ? Policy indicator
What does the money supply indicate ? Whether there is plenty of liquidity in the UK's financial system.
Changes in the money supply provide the government and the Bank of England with information about what ? What is happening in the economy and what is likely to happen
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