Economics - Macroeconomic Policies

Instead the Bank of England has used quantitative easing, which pushes more money into the economy

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

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

This makes it impossible to follow an expansionary monetary policy by reducing interest rates

Interest rates are currently at 0.5%

Changes in interest rates have a large effect on AD

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

They also lower investment (I) by firms as it is more expensive to borrow

Higher interest rates have two major influences on aggregate demand

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

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

It is the rate at which one currency exchanges for another

A depreciation in the pound would make it cheaper for foreign buyers to purchase UK goods

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

A strong pound will lower aggregate demand due to the worsening of the balance of payments (X - M)

TIP: Remember the term SPICED, meaning Strong Pound, Imports Cheaper, Exports Dearer

The main objective is stablising prices and therefore inflation

Improving factor mobility: measures to overcome factor immobility will improve the working of the market

Cutting taxes: to encourage effort as firms, entrepreneurs and workers will keep a larger percentage of their gross income

They make borrowing more expensive and so lead to lower consumption (C)

Expanding education and training: this will improve labour productivity and the flexibility of the work force

This involves targeting budget deficits if economic growth and full employment are the main aims Reducing welfare benefits: to discourage people from relying on the state, and pressure them to seek employment

Supplyside Policies

These are measures intended to increase the productive capacity of the economy

Promoting enterprise and innovation: to provide more choice, competition and new ideas

Subsidies are given to producers of merit goods that create positive externalities, to increase their consumption

Indirect taxes are imposed on demerit goods or goods that cause negative externalities, to reduce their consumption

Government spending and taxation are used to avoid microeconomic market failure

This involves targeting a budget surplus if the priority is low inflation and better balance of payments

It has little direct impact on long run aggregate supply

The use of the banking system to achieve macroeconomic objectives and has three main strands: interest rates, money supply and the exchange rate

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

Money Supply

This is the total of monetary assets, such as cash and credit, available in an economy

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

Capital spending: looking to improve productive capacity e.g infrastructure

Current spending: running the public sector e.g wages

This is an example of contractionary fiscal policy

If inflation is high and the balance of payments in deficit, then a budget surplus where G < Twould take money out of the economy

Discretionary fiscal policy is the deliberate manipulation of the budget to achieve macroeconomic aims

Involves the use of taxation and government spending REMEMBER: Fizzy G+T

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

In the 1930's economic growth was low and unemployment high so Keynes suggested a budget deficit where G > T

Before Keynes, governments aimed to balance their budgets with taxation equalling government spending so G = T

Microeconomic Aims

Redistribution of Income and Wealth

Fiscal Policy

Government spending is usually on merit goods and publics as it aims to correct market failures

This is expansionary fiscal policy and increases AD and so boosts GDP

Fiscal Policy and Demand Management

Macroeconomic Policies

Monetary Policy

The Exchange Rate A strong pound also means lower costs of production for firms, but it does mean slower economic growth

This is known as contractionary monetary policy

Fiscal policy fulfils demand management, supplyside policy, microeconomic objectives and the redistribution of income and wealth

Redistribution conflicts with supply-side policies and so in recent decades inequalities have increased

It influences agregate demand (the toal demand within an economy). It is made up of consumption, investment, government spending and net exports

Fiscal Policy and Supplyside Policies

AD = C + I + G + (X - M)

Increased government spending is known as expansionary or loosening fiscal policy. This increases AD

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

Progressive taxation, such as income tax (where a higher percentage is taken from high earners), helps redistribution

Spending on welfare benefits, pensions, the NHS and state educations are examples of the aim to redistribute income and wealth

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