The application of macroeconomic policy instruments and the international economy

The application of macroeconomic policy instruments and the international economy

1. Fiscal-tax and expenditure

   • reflationary=increase AD
   • deflationary=decrease AD
   • discretionary fiscal=govt actively influence AD
   • automatic stabilisers=forms of govt spending and tax that change automatically
   • progressive tax=takes a higher % of income from the rich e.g. income
   • regressive tax=takes higher % of income from poor-flat rate e.g. VAT
   • limitations
     • time lag after implementation
     • takes time to recognise need to change
     • complex and time consuming
     • some forms of govt spending are inflexible/hard to stop
     • other components, external factors
     • -ve impact on other macroeconomic objectives (inflation/unemployment)

2. Monetary-money supply, interest rate, exchange rate

   • reflationary=increase AD
   • deflationary=decrease AD
   • interest rate
     • increase base rate>reduce cons/investment
     • high interest rate> UK people save> abroad save into UK bank> imp greater than exp> decrease AD
   • money supply
     • print more money so that more money is available which in turn increases investment and increase in supply
   • exchange rate
     • to reduce exchange rate,selling the £ would increase supply of £ on foreign exchange. this reduces its values and AD increase as exp>imp

3. Supply side policies-influence CELL by increasing the quality and quantity of factors of production

   • education and training=increase quality and quantity of workforce (more skilled labourers)
   • govt assistance to new firms=no of firms increase>higher efficiency of FOP and aggregate supply
   • reduce direct taxes=more workers/encouraged to work (competition gives incentive to invest)
   • reduce minimum wage=more incentive to work if increased and at a younger age
   • reduce unemployment benefits=not getting disposable income to meet standards of living
   • reduce trade union power=in interest of workers so able to produce more>increased AS
   • privatisation=more competition to be the leading firm. likely to use factors of production more efficiently as formally owned by the govt
   • limitations
     • reduce income tax=won't increase labour force (people don't want to work/can't find work)
     • removal of NMW=company has less power than employee to negotiate wages
     • reduce unemploymt benefits=reduce benefits>reduce level of consump of unemployd>lack of demand for some firms>cut costs by incr unemp>high unemploymt
     • reduce trade union power=more expensive for firms to negotiate individually and time consuming>influx of redundancy

4. International trade:exchange of goods and services between countries

   • benefits
     • higher AD, larger target market, range and variety, better quality goods, profit/higher sales, lower prices
   • what makes this possible
     • free trade, advanced technology, planes, MNCs, specialisation in certain economies, more firms to choose from
   • free trade: when there are no barriers to trade, thus allowing goods and services to move freely between countries
   • protectionism: restrictions that are put in place by the govt/international orgs to prevent the free movement of goods and services between countries
   • Measures
     • quota:physical limit on the number/value of goods that can be imported into a country within a period of time
       • aim=discourage foreign goods,encourage domestic consumption. effect=stop oversupply,increase in price of products
       • who benefit? domestic producers/workers/govt
       • who lose out? consumers (pay more), foreign countries, govt (in comparison with tariff)
     • tariff:raises the prices of imported goods
       • aim=make imp goods look less attractive, protest domestic jobs, to increase demand>rise in price
       • limitations:encourage illegal sale, won't necessarily stop consumption of foreign goods, other country may impose retaliatory tariff,no close subst
     • voluntary export restraint:agreemt between exp and imp countries where the exporting country agrees to limit quant of exp of specific gd below a level
       • why? build international relations, could lead to retaliatory imposition, less harsh than stricter limits
       • limitations=takes long time to form an agreement, still reduces ability to export
   • administrative barriers
     • red tape:lengthy and complicated process of paperwork that must be completed on imported goods
     • quality standards:restrictions placed on types of goods that can be sold in domestic market,or on manufact methods to ensure safety of the public
     • embargoes:an extreme quota/a complete ban on imports
     • govt purchasing powers: govt reduce imp by favouring domestic firms when it places orders despite them producing at higher cost/LQ