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
Teacher recommended
?- Created by: Clodagh
- Created on: 12-04-13 10:35
View mindmap
- 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)
- This is known as contractionary monetary policy
- 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
- This makes it impossible to follow an expansionary monetary policy by reducing interest rates
- 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
- Fiscal Policy
Comments
Report
Report
Report
Report
Report