Role of the state in the macroeconomy: macroeconomic policies Microeconomics Topic 1: The Economic Problem Role of the state in the macroeconomy: macroeconomic policies

Microeconomics Topic 1: The Economic Problem 4.5.3 Unit content Students should be able to: Distinguish between fiscal policy, monetary policy, exchange rate policy, supply-side policies and direct controls in different counties with reference to the impact of: measures to reduce fiscal deficits and national debts; measures to reduce poverty and inequality; changes in interest rates and the supply of money; measures to increase international competitiveness Assess the use and impact of macroeconomic policies to respond to external shocks to the global economy Evaluate measures to control global companies (transnationals) operations: regulation of transfer pricing; limits to government ability to control global companies Assess the problems facing policymakers when applying policies: inaccurate information; risks and uncertainties; inability to control external shocks

Microeconomics Topic 1: The Economic Problem (a) Fiscal policy Microeconomics Topic 1: The Economic Problem What is fiscal policy? Give examples of macroeconomic objectives

Microeconomics Topic 1: The Economic Problem (a) Demand management Microeconomics Topic 1: The Economic Problem What is demand management? What is the link between a larger budget deficit (or a smaller budget surplus) and the circular flow? What is deflationary (contractionary) fiscal policy?

(a) Problems with using macroeconomic policies Microeconomics Topic 1: The Economic Problem (a) Problems with using macroeconomic policies “Often national macroeconomic problems have global causes, and therefore, there are limits to national macroeconomic policies in correcting these problems.” when could you use this sentence in an exam? What happened in the 1930s and why would it be different now? Today, any reduction in export earnings or investment would have less impact because?

(a) Fiscal policy: automatic stabilisers v discretionary policy Microeconomics Topic 1: The Economic Problem (a) Fiscal policy: automatic stabilisers v discretionary policy The financial crisis of 2008 resulted in many countries using fiscal policy as a Keynesian tool to stimulate the economy. What is the distinction between automatic stabilisers and discretionary fiscal policy? • Automatic stabilisers: • Discretionary fiscal policy:

Microeconomics Topic 1: The Economic Problem (a) Monetary policy What is monetary policy? Why is it difficult for a central bank to control inflation in its own country?

(a) Supply side policies Microeconomics Topic 1: The Economic Problem (a) Supply side policies What are supply-side policies designed to do? Complete the examples and explanations below: Improving education so that Improving _________ so that life expectancy increases Teaching entrepreneurship so that Reducing discrimination to

Microeconomics Topic 1: The Economic Problem (a) Direct controls Direct controls are forms of ___________ which work outside the ____________ system. They include: maximum ________ controls (e.g. used in _____________ countries to control the price of food), minimum _____________ prices (including national minimum wages) and wage controls control, developing, guaranteed, market, price

(a) Measures to reduce fiscal deficits and national debts Microeconomics Topic 1: The Economic Problem (a) Measures to reduce fiscal deficits and national debts Following the 2007/8 financial crisis, most developed countries faced increased fiscal deficits and national debts. If developed countries have a fiscal deficit greater than 3% of GDP it will lead to a growing national debt that becomes difficult to sustain (UK 2016 4.1%!) e.g. Greece 7.5% in 2015. How could the government reduce fiscal deficits and national debts? Fiscal austerity (see 4.5.3): Do nothing and wait for the automatic stabilisers to work. This only works if the deficit is?

(a) Examples of countries and their attempts to reduce fiscal deficits Microeconomics Topic 1: The Economic Problem __________, __________, __________ had structural problems before the recession and so had no choice but to use fiscal austerity (enforced by their lenders). _________ and the _________ used automatic stabilisers and the rise in GDP to correct their deficits. This worked in the US but was less successful in France as they had low growth after the recession The ________ originally didn’t use austerity (2008-10) as the economy recovered well, but in 2010 a new government reversed policies and cut spending and increased taxes. This led to slower growth. France Greece, Portugal, Spain, UK, US

(a) Measures to reduce national debts Microeconomics Topic 1: The Economic Problem (a) Measures to reduce national debts

(a) measures to reduce poverty and inequality Microeconomics Topic 1: The Economic Problem (a) measures to reduce poverty and inequality How could the government reduce poverty and inequality?

(a) Measures to increase international competitiveness Microeconomics Topic 1: The Economic Problem (a) Measures to increase international competitiveness List measures to increase international competitiveness:

(Q2) Recap fiscal policy data response UK to increase VAT Microeconomics Topic 1: The Economic Problem (Q2) Recap fiscal policy data response UK to increase VAT ‘Chancellor George Osborne's 2.5% VAT rise is to help balance Britain's books, but many shoppers at Europe's biggest urban retail centre are not convinced it is a price worth paying. The increase in VAT from 17.5% to 20% from 4 January 2011 received a mixed reaction from people at Westfield in west London. As news of the biggest package of tax increases and spending cuts in a generation filtered down to the streets, some were incensed, others unsurprised. Kelly Byrne, a senior sales assistant at a clothing store, said the VAT rise was unfair on ordinary people "in basic jobs, on basic wages".’ Source: adapted from www.bbc.co.uk

(Q2) Recap fiscal policy data response UK to increase VAT Microeconomics Topic 1: The Economic Problem (Q2) Recap fiscal policy data response UK to increase VAT a. Explain how the 2011 rise in VAT will affect aggregate demand. Include a diagram in your answer. b. Given the likely effects of such a tax increase, explain why the higher VAT rate may be required in the UK economy. c. How else might the Chancellor be able to utilise fiscal policy to ‘balance Britain’s books’? Source: adapted from www.bbc.co.uk

(Q3) Data response Romanian Healthcare Expenditure Microeconomics Topic 1: The Economic Problem (Q3) Data response Romanian Healthcare Expenditure Source: adapted from www.bbc.co.uk

(Q3) Data response Romanian Healthcare Expenditure Microeconomics Topic 1: The Economic Problem (Q3) Data response Romanian Healthcare Expenditure a. Explain how the short and long-run effects of the 2011 and 2012 changes could be shown on an AS/AD diagram. b. How might such expenditure plans be financed? Provide at least 2 methods. c. What are some of the general problems in using fiscal policy to achieve an economy’s macro objectives? Source: adapted from www.bbc.co.uk

(b) External shocks to the global economy Microeconomics Topic 1: The Economic Problem (b) External shocks to the global economy Give examples of possible external shocks to the global economy:

(c) Measures to control the operations of global companies Microeconomics Topic 1: The Economic Problem (c) Measures to control the operations of global companies List measures to control the operations of global companies: A requirement that:

Microeconomics Topic 1: The Economic Problem (c) Transfer pricing What is transfer pricing? This refers to the ______ policies adopted by groups of companies for transactions between companies in the group, such as the ______ of goods or the provision of services. As corporate _______ rates varying from country to country, there is the potential for _________ companies to ____________ their global tax bill by manipulating the prices charged on intra-group transactions. Measures to regulate transfer pricing are more difficult for __________ powerful countries. global, less, pricing, reduce, sale, tax

(c) Limits to government ability to control global TNCs Microeconomics Topic 1: The Economic Problem (c) Limits to government ability to control global TNCs TNCs are often ‘footloose’, i.e. they may be able to move to another country easily and with little cost. International agreements such as TRIMS (Trade Related Investment Measures) introduced by the WTO There are rules that restrict preference of domestic firms and thereby enable international firms to operate more easily within foreign markets. Policies such as local content requirements and trade balancing rules that have traditionally been used to both promote the interests of domestic industries and combat restrictive business practices are now banned. Source: adapted from www.bbc.co.uk

(d) Problems facing policy makers when applying policies Microeconomics Topic 1: The Economic Problem (d) Problems facing policy makers when applying policies Inaccurate/out-of-date information on Risks and uncertainties: difficult to predict the impact of Inability to control external shocks: increasingly Source: adapted from www.bbc.co.uk