Economics - Macroeconomic Policies

Overview of Macroeconomic Policies. NOTE: some supply-side policies are mentioned in fiscal and monetary policy as they cross over. AS Economics Unit 2 AQA

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  • Created by: Clodagh
  • Created on: 12-04-13 10:35
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  • Macroeconomic Policies
    • Fiscal Policy
      • Involves the use of taxation and government spending REMEMBER: Fizzy G+T
      • Fiscal policy fulfils demand management, supply-side policy, microeconomic objectives and the redistribution of income and wealth
      • It influences agregate demand (the toal demand within an economy). It is made up of consumption, investment, government spending and net exports
        • Increased government spending is known as expansionary or loosening fiscal policy. This increases AD
        • AD = C + I + G + (X - M)
      • Government spending is usually on merit goods and publics as it aims to correct market failures
        • Current spending: running the public sector e.g wages
        • Capital spending: looking to improve productive capacity e.g infrastructure
        • Transfer payments: no service in return for their spending e.g JSA
      • Also used to influence aggregate supply (the total value of goods and services in an economy). There are changes in taxation and government spending to create incentives for firms
      • Fiscal Policy and Demand Management
        • Before Keynes, governments aimed to balance their budgets with taxation equalling government spending so  G = T
        • In the 1930's economic growth was low and unemployment high so Keynes suggested a budget deficit where G > T
          • This is expansionary fiscal policy and increases AD and so boosts GDP
        • If inflation is high and the balance of payments in deficit, then a budget surplus where G < Twould take money out of the economy
          • This is an example of contractionary fiscal policy
        • Discretionary fiscal policy is the deliberate manipulation of the budget to achieve macroeconomic aims
          • This involves targeting budget deficits if economic growth and full employment are the main aims
          • This involves targeting a budget surplus if the priority is low inflation and better balance of payments
      • Fiscal Policy and Supply-side Policies
        • Examples of supply-side measures include reduced taxes, cuts in welfare benefits and spending on infrastruture
        • Tax increases and spending cuts are politically unpopular and so budget surpluses are less common
        • Since 1979 the aim of the government has been to provide a balanced budget over time
          • There has been 6 budget surpluses and 28 budget deficits
      • Microeconomic Aims
        • Government spending and taxation are used to avoid microeconomic market failure
        • Indirect taxes are imposed on demerit goods or goods that cause negative externalities, to reduce their consumption
        • Subsidies are given to producers of merit goods that create positive externalities, to increase their consumption
      • Redistribution of Income and Wealth
        • Spending on welfare benefits, pensions, the NHS  and state educations are examples of the aim to redistribute income and wealth
        • Progressive taxation, such as income tax (where a higher percentage is taken from high earners), helps redistribution
        • Redistribution conflicts with supply-side policies and so in recent decades inequalities have increased
    • Monetary Policy
      • The use of the banking system to achieve macroeconomic objectives and has three main strands: interest rates, money supply and the exchange rate
      • Interest Rates
        • The Bank of England is a public corporation owned by the government. The Monetary Policy Committee (MPC) of the Bank of England meets each month to set interest rates
        • Higher interest rates have two major influences on aggregate demand
          • They make borrowing more expensive and so lead to lower consumption (C)
          • They also lower investment (I) by firms as it is more expensive to borrow
            • This is known as contractionary monetary policy
              • They make borrowing more expensive and so lead to lower consumption (C)
        • The government's target for which the Bank of England is responsible is to achieve 2% CPI inflation. If inflation is expected to exceed 2% then the MPC is likely to set higher interest rates
        • Lower interest rates have the opposite effect to higher interest rates and encourage consumption and investment. This is expansionary monetary policy. This will be used if inflation is below 2%
        • Interest rates are currently at 0.5%
          • This makes it impossible to follow an expansionary monetary policy by reducing interest rates
            • Instead the Bank of England has used quantitative easing, which pushes more money into the economy
        • Changes in interest rates have a large effect on AD
          • It affects the housing market as higher interest rates increase the cost of mortgages
          • When businesses and consumers are worried about the risk of a recession, an interest rate cut can boost confidence and then boost AD
      • Money Supply
        • This is the total of monetary assets, such as cash and credit, available in an economy
        • Money is defined as 'anything that is widely accepted in exchange for goods and services'
          • Money performs four main functions: a medium of exchange, a store of value, a unit of account and a standard of deferred payments
        • If money, such as cash, bank deposits and credit cards, increases dramatically then it may cause inflation and so the government may wish to control the money supply
      • The Exchange Rate
        • It is the rate at which one currency exchanges for another
        • The increase in value of sterling means that UK exports are more expensive in Europe as euro countries need to pay more euros for each pound
          • TIP: Remember the term SPICED, meaning Strong Pound, Imports Cheaper, Exports Dearer
          • A depreciation in the pound would make it cheaper for foreign buyers to purchase UK goods
        • A strong pound will lower aggregate demand due to the worsening of the balance of payments  (X - M)
        • Exchange rates are set by market forces, but governments are major buyers of currency and so can exert some influence on rates to further their economic aims
        • A strong pound also means lower costs of production for firms, but it does mean slower economic growth
      • The main objective is stablising prices and therefore inflation
      • It has little direct impact on long run aggregate supply
    • Supply-side Policies
      • These are measures intended to increase the productive capacity of the economy
      • Cutting taxes: to encourage effort as firms, entrepreneurs and workers will keep a larger percentage of their gross income
      • Reducing welfare benefits: to discourage people from relying on the state, and pressure them to seek employment
      • Improving factor mobility: measures to overcome factor immobility will improve the working of the market
      • Expanding education and training: this will improve labour productivity and the flexibility of the work force
      • Promoting enterprise and innovation: to provide more choice, competition and new ideas

Comments

mallika

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VERY HELPFUL THANKYOUUUUUU

izzy

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WOW! this is amazing, thank you

davidsalter

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This mind map covers all macroeconomic policy. I found it a little complicated as there were many strands but for students who like to learn from mind maps and who have the patience to follow it through, this would be valuable

Dankyy~

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Thanks a bunch my dude.

SyedHaiderAbbas

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Thanks champ

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