Introduction to Macroeconomic Policy

What Introduction to Macroeconomic Policy covers

Introduction to Macroeconomic Policy is examined in Paper 2, Competing in the global economy, and in Paper 3, The economic environment and business. It covers the main macroeconomic objectives, fiscal policy, monetary policy and interest rates, supply-side policies, exchange rate policy under a floating rate, conflicts between macroeconomic objectives and choosing policy instruments and their unintended consequences.

The 7 subtopics

Each one has its own page.

• The main macroeconomic objectivesThe four main macroeconomic objectives, actual against potential and sustainable growth, full employment and why it is not zero unemployment, the UK inflation target and the Governor's letter, stable inflation, the current account and when a deficit matters, other objectives, and why the objectives conflict.Open →
• Fiscal policyFiscal policy, expansionary and contractionary, how an income tax cut raises aggregate demand, direct and indirect taxes in the UK, budget deficits against the national debt, automatic stabilisers against discretionary policy, crowding out, corporation tax and supply, time lags, infrastructure spending, and constraints from rising debt.Open →
• Monetary policy and interest ratesMonetary policy and Bank Rate, how higher interest rates reduce consumption, investment and net exports, the transmission channels, quantitative easing and why it was used after 2008, the zero lower bound, Bank of England independence, time lags, overdraft costs, and why rate cuts can fail in a deep recession.Open →
• Supply-side policiesSupply-side policies, market-based against interventionist, income tax cuts and benefit reform, the unemployment trap, education, training and apprenticeships, infrastructure and research subsidies, privatisation and deregulation, facing inflation and unemployment together, general drawbacks, and corporation tax as a supply-side measure.Open →
• Exchange rate policy under a floating rateFloating and fixed exchange rates, the advantages and disadvantages of floating, automatic correction of a current account deficit, managed floats and intervention without interest rates, foreign exchange reserves, conflict between exchange rate and inflation goals, price inelastic exports, transmission of rate cuts, and exporters' preference for stability.Open →
• Conflicts between macroeconomic objectivesPolicy trade-offs, the short-run Phillips curve and the inflation and unemployment trade-off, the 1970s, the natural rate of unemployment and the long-run Phillips curve, supply-side improvement, growth against the environment and externalities, sustainable growth, growth against the current account and deficit reduction, time lags, and external shocks.Open →
• Choosing policy instruments and their unintended consequencesKeynesian and free-market views of managing the macroeconomy, the monetarist explanation of inflation, disagreement over fiscal stimulus, choosing policies for demand-deficient and structural unemployment and demand-pull and cost-push inflation, the unintended consequences of interest rates, benefit cuts and subsidies, government failure, uneven effects, and combining instruments.Open →

What you need to know

Answer each one before you reveal it.

Take Introduction to Macroeconomic Policy further

The same content, four other ways.

Commonly confused

Pairs that lose marks when they are blurred together.

• Fiscal policy vs Monetary policy

  Fiscal policy: the use of government spending and taxation to influence aggregate demand and the level of economic activity. Monetary policy: the use of interest rates and the money supply by the central bank to influence aggregate demand and control inflation.

• Budget deficit vs National debt

  Budget deficit: the amount by which government spending exceeds the revenue raised in a single year. National debt: the total stock of past government borrowing still outstanding.

• Automatic stabilisers vs Discretionary fiscal policy

  Automatic stabilisers: features of the tax and benefit system that dampen the cycle with no decision taken, as receipts fall and benefit spending rises in a downturn. Discretionary fiscal policy: a deliberate change to tax rates or spending programmes, decided and announced by the government.

Questions from this topic

Each one with the model answer underneath.

1. 1

   Name the four main macroeconomic objectives of a government.

   Model answer

   Sustained economic growth, low unemployment, low and stable inflation, and equilibrium on the current account of the balance of payments.

2. 2

   What is economic growth?

   Model answer

   Economic growth is an increase in an economy's real output, usually measured as the percentage change in real GDP over a year.

3. 3

   How does actual growth differ from potential growth?

   Model answer

   Actual growth is a rise in real output achieved by using existing capacity more fully, whereas potential growth is an increase in the economy's productive capacity itself.

4. 4

   Why does a government want growth to be sustainable as well as fast?

   Model answer

   Growth pushed beyond capacity generates inflation and a widening current account deficit, and growth that depletes resources or damages the environment cannot be continued.

5. 5

   State two benefits to a firm of steady economic growth.

   Model answer

   Rising household incomes expand the market for its products, and the confidence that demand will keep growing makes investment worthwhile.

6. 6

   What is meant by full employment?

   Model answer

   Full employment is the situation in which everyone willing and able to work at the going wage has a job, so only frictional and some structural unemployment remains.

What is inside Levo

Six ways to work the same material.

Introduction to Macroeconomic Policy revision questions

What does Introduction to Macroeconomic Policy cover in Edexcel A-Level Economics B?

7 subtopics: the main macroeconomic objectives, fiscal policy, monetary policy and interest rates, supply-side policies, exchange rate policy under a floating rate, conflicts between macroeconomic objectives and choosing policy instruments and their unintended consequences. Each one has its own page with questions and model answers.

How is Introduction to Macroeconomic Policy organised?

By the Edexcel 9EB0 specification, subtopic by subtopic, so it matches the order you are taught it in.