The application of macroeconomic policy instruments and the international economy

Fiscal-tax and expenditure
1. reflationary=increase AD
2. deflationary=decrease AD
3. discretionary fiscal=govt actively influence AD
4. automatic stabilisers=forms of govt spending and tax that change automatically
5. progressive tax=takes a higher % of income from the rich e.g. income
6. regressive tax=takes higher % of income from poor-flat rate e.g. VAT
7. limitations
  1. time lag after implementation
  2. takes time to recognise need to change
  3. complex and time consuming
  4. some forms of govt spending are inflexible/hard to stop
  5. other components, external factors
  6. -ve impact on other macroeconomic objectives (inflation/unemployment)
Monetary-money supply, interest rate, exchange rate
1. reflationary=increase AD
2. deflationary=decrease AD
3. interest rate
  1. increase base rate>reduce cons/investment
  2. high interest rate> UK people save> abroad save into UK bank> imp greater than exp> decrease AD
4. money supply
  1. print more money so that more money is available which in turn increases investment and increase in supply
5. exchange rate
  1. to reduce exchange rate,selling the £ would increase supply of £ on foreign exchange. this reduces its values and AD increase as exp>imp
Supply side policies-influence CELL by increasing the quality and quantity of factors of production
1. education and training=increase quality and quantity of workforce (more skilled labourers)
2. govt assistance to new firms=no of firms increase>higher efficiency of FOP and aggregate supply
3. reduce direct taxes=more workers/encouraged to work (competition gives incentive to invest)
4. reduce minimum wage=more incentive to work if increased and at a younger age
5. reduce unemployment benefits=not getting disposable income to meet standards of living
6. reduce trade union power=in interest of workers so able to produce more>increased AS
7. privatisation=more competition to be the leading firm. likely to use factors of production more efficiently as formally owned by the govt
8. limitations
  1. reduce income tax=won't increase labour force (people don't want to work/can't find work)
  2. removal of NMW=company has less power than employee to negotiate wages
  3. reduce unemploymt benefits=reduce benefits>reduce level of consump of unemployd>lack of demand for some firms>cut costs by incr unemp>high unemploymt
  4. reduce trade union power=more expensive for firms to negotiate individually and time consuming>influx of redundancy
International trade:exchange of goods and services between countries
1. benefits
  1. higher AD, larger target market, range and variety, better quality goods, profit/higher sales, lower prices
2. what makes this possible
  1. free trade, advanced technology, planes, MNCs, specialisation in certain economies, more firms to choose from
3. free trade: when there are no barriers to trade, thus allowing goods and services to move freely between countries
4. protectionism: restrictions that are put in place by the govt/international orgs to prevent the free movement of goods and services between countries
5. Measures
  1. quota:physical limit on the number/value of goods that can be imported into a country within a period of time
    1. aim=discourage foreign goods,encourage domestic consumption. effect=stop oversupply,increase in price of products
    2. who benefit? domestic producers/workers/govt
    3. who lose out? consumers (pay more), foreign countries, govt (in comparison with tariff)
  2. tariff:raises the prices of imported goods
    1. aim=make imp goods look less attractive, protest domestic jobs, to increase demand>rise in price
    2. limitations:encourage illegal sale, won't necessarily stop consumption of foreign goods, other country may impose retaliatory tariff,no close subst
  3. voluntary export restraint:agreemt between exp and imp countries where the exporting country agrees to limit quant of exp of specific gd below a level
    1. why? build international relations, could lead to retaliatory imposition, less harsh than stricter limits
    2. limitations=takes long time to form an agreement, still reduces ability to export
6. administrative barriers
  1. red tape:lengthy and complicated process of paperwork that must be completed on imported goods
  2. quality standards:restrictions placed on types of goods that can be sold in domestic market,or on manufact methods to ensure safety of the public
  3. embargoes:an extreme quota/a complete ban on imports
  4. govt purchasing powers: govt reduce imp by favouring domestic firms when it places orders despite them producing at higher cost/LQ

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The application of macroeconomic policy instruments and the international economy

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