Next topic: Policies for Growth and Development From scheme of work – for this lesson Macroeconomics Policies (review & consolidate from Theme 2, in preparation for topics that follow) 1 lesson   Assess the use of and effectiveness of Fiscal, Monetary & Supply Side policies to achieve the 7 macroeconomic objectives (consider general problems that limit their effectiveness – eg. time lags, inaccurate data, conflicts with other objectives) Use the AD / AS / LRAS models to illustrate the impact of these policies

Refresher – what are 7 macro economic objectives (in UK) Where are there internal conflicts in objectives? UK Government Policy Objectives a) Maximisation of Economic growth b) Minimisation of Unemployment c) Inflation targeted at 2% - BoE to target this level and independent of UK Gov’t to set UK short term interest rates d) Balance of payments – to balance current account (and by implication then the capital account). Currently running current account deficit = 5.2% of GDP e) Government budget – to balance the Gov’t budget so that UK Gov’t is not borrowing money that must be paid back later (+ interest), to fund current spending f) The environment – protect the environment commensurate with economic activity g) Income distribution – generally target a fair distribution of income  

Fiscal policy: increase Govt spending, (could decrease vat, stamp duty) to increase Aggregate Demand Monetary Policy: Influence AD lower via lower IR% = higher asset prices (Wealth effect) + greater consumption, diminish saving, increase investment, potentially lower exchange rate Exchange Rate Policy: devalue £ as long as PED for Imports and Exports is relatively elastic Supply side policy – reduce UE Benefit, provide education, incentives for firms to invest, reduce regulation, decrease Income tax, National Insurance contribution to increase incentives to work, decrease Corporation tax (potentially in return for increased R&D spending), promote competition by reducing monopoly power, improve labour market flexibility (Improve mobility – both sectoral (ie re-training ship building labour to work in service industry) and geographical (creation of enterprise zones – incentives to bring industry to locate near excess pools of labour), reduce regulation, potentially allow more migration to increase competition and/or induce highly qualified migrants to UK, reduce unionisation, lower or abolish minimum wage). Policy to promote and encourage new business start-ups. Inflation(price level) – supply side improvements may lower price level and allow AD increase by BoE to keep Inflation at target 2% Direct controls: Public sector pay awards limited by government policy, control on price of utilities (ie cap energy bills), set low minimum wage

Promoting Growth & Development What is growth and development? What does good economic growth look like? How do nations ensure that the benefits of growth reach the most vulnerable?

Economic Development & Growth Characteristics to measure Economic Development Per Capita Income Quantity of Physical Capital Quality of Human Capital (ie Education) Health and Mortality (Life expectancy at birth, infant mortality) Population growth (Lower growth associated with developed economies and vice versa) Unemployment / underemployment (Underemployment where workers either want to work longer hours but not work in not available or overqualified for their current jobs ie Doctors driving cabs) Institutional structures (democratic structures, transparent and fair legal system, separation of government and legal system, independent police force) Environmental controls (advance environmental legislation and protection in developed world) Economic Development Economic Growth Benefits of growth for the most vulnerable: Redistribution of income via taxation (progressive tax system) Availability of education and training Subsidisation of Health care, housing, basic foods, transport and education