Can governments control the economy?

What does macroeconomic policy aim to do?
To control the level of activity in the economy so standard of living improves and stability is maintained.
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What four economic objectives does the government pursue?
Low and steady rate of inflation, low unemplyment, positive balance of payments, sustainable economic growth.
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Why is sustainable growth important?
If the economy grows too fast inflation may rise because demand is growing and supply can't keep up.
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Why is a steady inflation rate desirable?
To high a rate damages the economy because it sis unpredictable so planning and investment is more difficult.
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Why is low unemployment needed?
Maximises output and is desirable for political and social reasons. Unemployment leads to poverty and wastes resources.
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Why is a positive balance of payments desirable?
Imports exceeds exports a trade defecit will form this will need to be financed by borrowing.
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What is excess demand?
When demand is growing faster than the producers can expand their output. This means they can raise prices and still sell all they produce, so inflation rises.
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Which 3 policies does the government use to achieve its four main objectives?
Fiscal, Monetary, Suply-side policy.
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What happens when national income increases?
Output expands, GDP grows faster, Unemployment falls
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What happens when national income inecreases?
Output decreases, GDP growth slows, Inflation is reduced
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What happens when national income decreases?
Output decreases, GDP growth slows, Inflation is reduced
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What is a contractionary policy?
Used to reduce the level of economic activity and national income. This slows demand for imports.
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What is an expansionary policy?
Used to stimulate economic activity, raise national income ans stimulate growth and reduce unemployment.
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What are the features of a contractionary policy?
Higher interest rates, Tax increases, Cuts in government expenditure
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What is an expansionary policy?
Lower interest rates, Tax cuts, Increased government expenditure
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What is aggregate demand?
Is the total demand in the economy from consumption, investment, government expenditure and the net amount of trade.
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Which four components is aggregate demand made up of?
Consumption, Investment, Government expenditure, The net amount of trade.
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What is consumption?
The total of all spending by individuals for private use.
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What is investment?
The total of all spending by businesses on capital
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What is government expenditure?
Total spending by the government.
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What is the balance of trade?
The difference between exports and imports
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What is aggregate supply?
The total of all goods and services produced in the economy over a period of time.
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What is fiscal policy?
Involves changes in the levels of taxation and government expenditure to influence the level of economic activity
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What is a public sector defecit?
Happens when government spending exceeds the government's income and must borrow to fund the difference.
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How does an expansionary fiscal policy work?
Taxation reduced and gov't expenditure increased, Disposable income rises, If gov't expenditure is increased employment increases increasing income, rise in consumption, more goods consumed so output increases, more emloyment, AD increases +GDP grows
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How does and contractionary fiscal policy work?
Taxation increased and gov't expenditure increases, more taxes paid so disposable income falls, if gov't expenditure decreases employment and incomes fall, fall in consumption, less goods consumed output decreases, more unemployment AD+GDP decreases
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What is monetary policy?
Uses interest rates to vary the cost of borrowing and influence the level of aggregate deamand.
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What happens if interest rates increase?
Consumers pay more to take out loans and use credit cards, mortgage repayments increase, businesses pay more to get finance so investment reduces
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How does a expansionary monetary policy work?
Interest rate reduced, other interest rates reduce, cost of borrowing falls, rise in consumption and investment, more goods consumed so businesses increase output, unemployment falls, AD increases and the economy grows.
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How does a contractionary monetary policy work?
Interest rate increased, Other interest rates increase, Cost of borrowing increases, Fall in consumption and investment, Fewer goods consumed so output decreases, increase in unemployment, AD has decreased and the economy has reduced
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What is quantitive easing?
Increases liquidity in the banking system, meaning banks have more cash and more likely to lend to businesses that could provide the basis for economic recovery
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What is a trade off?
Occurs when two objectives cannot be both achieved at once. The more you have of one variable the less you have of another.
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What are the private benefits of increasing growth rate?
GDP increases, unemployment falls as increased GDP leads to more production and jobs.
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What are the externalities of an increasing growth rate?
May cause inflation to accelerate. As incomes increase imports may increase damaging the balance of trade.
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What are the private benefits of reducing inflation?
Inflation slows, Exports may increase as they become more competitive, balance of trade improves.
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What are the private benefits of reducing unemplyment?
Retraining or job created reduced unemployment, increased GDP
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What are the externalities of reducing inflation?
Growth slows down as a result unemplyment increases
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What are the externalities of reducing unemployment?
May cause inflation to accelerate, incomes increase which increases imports worseing the balance of trade.
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What are supply side policies?
Include all measures designed to increase the productive capacity of the economy. They influence aggregate supply rather than aggregate demand.
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What are the features of supply side policies?
Narrow scope, help the economy produce more and use resources more efficiently, reduce inflationary pressures.
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Give examples of supply side policies?
Privatisation, Deregulation, reducing taxation, reducing power of Trade Unions, reducing welfare spending, increasing education + training, competition policy, trade policy, regional policy, encourageing investment + R&D, Improving infrastructure.
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What is regional policy?
Policies aimed at helping specific areas develop. They may be suffering structural change. Businesses may be encouraged to set up
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Why might the government reduce the power of trade unions?
Can be seen as a market imperfection, keep wager higher than they otherwise would be and impose restrictions on efficient work practices.
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Why might a government deregulate?
By reducing barriers and rules it encourages stronger competition and efficiency.
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Why might a government privatise industries?
The private sector can be more efficient than the government.
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Other cards in this set

Card 2

Front

What four economic objectives does the government pursue?

Back

Low and steady rate of inflation, low unemplyment, positive balance of payments, sustainable economic growth.

Card 3

Front

Why is sustainable growth important?

Back

Preview of the front of card 3

Card 4

Front

Why is a steady inflation rate desirable?

Back

Preview of the front of card 4

Card 5

Front

Why is low unemployment needed?

Back

Preview of the front of card 5
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