Macroeconomic Policy

Use of government spending and taxation to achieve its economic objectives

Lowering taxes & increasing government spending

Economic growth increases

Disposable income increases → consumer spending increases → AD increases → output increases to meet demand → increases employment

Government spending increases more than tax receipts → increases AD → output increases to meet demand → increases disposable income

Economic growth decreases

Increase taxes, decrease government spending

Increase in any component of AD will leader to a proportionally greater increase in the equilibrium level

Government policies to reduce expenditure and increase revenue from taxation during periods of budget deficit

A budget deficit resulting from fluctuations in the economic cycle

A budget deficit arising from fundamental changes in the economic structure

Opportunity cost is higher the longer the deficit lasts, disincentive effect due to high taxes, government will lack legitimacy

Austerity may have social costs, affect income inequalities, lower economic growth, lack of investment may affect supply-side

Banks, building societies, investment banks, insurance companies, Bank of England

By providing individuals/businesses with loans e.g. mortgages

Maintain monetary stability (2% inflation rate), oversee financial stability

The ability to set policy free from political influence

Policy that aims to affect the price and quantity of money in the economy in order to achieve the government’s economic objectives

The interest rate set by the bank of England which affects the interest rates in the rest of the economy

Decreased incentive to borrow → decrease AD → GDP will fall as there’s lower demand → employment decreases → inflation may decrease → decreases disposable incomes

When the BoE creates more money, uses this to buy financial assets from banks so the banks have more money. This is then lent to consumers/businesses to boost AD

Policies that aim to increase the efficiency, productive capacity and flexibility of the economy to increase the growth rate

Improve international competitiveness, increases productive capacity, increases employability of worker, reduces unit costs

When the government takes more of an active role in the economy to improve economic performance

Increase workforce productivity, increase skills base of workforce, make UK firms more internationally competitive, make FDI more attractive

Opportunity cost to government, could lead to misallocation of resources, benefits won’t be realised till later

Increase firm productivity, increase flexibility of firms, make UK firms more internationally competitive, make FDI more attractive

Opportunity cost to government, could lead to misallocation of resources, benefits won’t be realised till later

Increase number of firms and so employment, increase number of entrepreneurs and so innovation

Misallocation of resources, might not be affordable, industry might not survive if government withdraws support

Prioritise social benefits over profit motive, set prices it deems fair, good for natural monopolies

No motivation to be more efficient, politicians may interfere base on political motives, may have no long-term investment

Increase incentives to work at given wage as keep more of their money

Increase incentive to invest in business through capital and innovation, may create more jobs

More of an incentive to enter labour market rather than rely on welfare state

The removal of regulations or restrictions on a particular business or industry

Cheaper to employ workers, easier to hire/fire workers, labour is more occupationally mobile

Workers have less of a voice, effect income distribution, social costs of low pay

Policy to increase competition in markets and make it easier for firms to enter markets

Increase incentive to be efficient, better QVC for consumers

Require regulators to monitor competition level, depends on level of competition

The process of transferring a public sector organisation to the private sector

Profit motive may act as incentive for firms to be more efficient, long-term view to be more productive, lead to increased competition and lower prices

Private monopolies may charge high prices, may still need regulating, depends on industry

Reduce inflationary pressures, increases employment, increases economic growth, improves current account on BoP