Edexcel Economics (A) A-level Theme 2: The UK Economy - Performance and Policies

2.6 Macroeconomic Objectives and Policies

2.6.1 Possible Macroeconomic Objectives

• Economic Growth: Sustainable growth is targeted, around 2.5% in the UK. Developing economies focus on economic development first.
• Low Unemployment: Aim for full employment with around 3% frictional unemployment.
• Stable Inflation: Target is 2% CPI in the UK for price stability.
• Balance of Payments: Equilibrium on current account to finance sustainably in the long term.
• Other Objectives:
  • Balance government budget to control borrowing and national debt.
  • Environmental protection for resource sustainability.
  • Greater income equality for societal fairness.

Demand Management

• Manage demand via monetary or fiscal policy.
• Increase AD during recession; decrease AD during boom.
• Supply-side policies for long-term growth.

2.6.2 Demand-side Policies

Monetary Policy

• Interest Rates: Managed by the MPC to control inflation. Affects borrowing costs, savings, asset demand, and consumer confidence.
• Quantitative Easing: Increases money supply by buying assets. Risks include inflation and ineffectiveness in confidence crisis.
• Bank of England's Role: MPC controls bank rate and quantitative easing.

Fiscal Policy

• Government Budgets:

  • Budget deficits/surpluses impact AD.
  • Indirect vs. direct taxation.

• Evaluation:

  • Policy impacts on LRAS, inequality, and incentives.
  • Expansion during austerity is challenging.

Evaluation of Demand-side Policies

• Issues:
  • Time lags and policy inflation-unemployment trade-offs.
  • Monetary vs fiscal policy effectiveness varies.

Great Depression & Global Financial Crisis

• Causes & Policy Responses:
  • Depression caused by Wall Street Crash.
  • GFC initiated by US mortgage crisis.
  • Policy responses varied across UK and USA.

2.6.3 Supply-side Policies

• Objectives: Increase productive potential and LRAS.

Market Based vs. Interventionist Methods

• Market Based: Remove market inefficiencies.
• Interventionist: Correct market failures.

Policies

• Increase Incentives: Tax/benefit adjustments to encourage work and investment.
• Promote Competition: Privatisation, deregulation, and competition policies.
• Labour Market Reforms: Increase flexibility and workforce participation.
• Improve Skills: Education and training investments.
• Infrastructure Improvements: Tax incentives/subsidies or direct investment.

Evaluation of Supply-side Policies

• Advantages: Long-term growth, price stability, export improvements.
• Disadvantages: Time lags, budget impacts, and potential AD effects.

2.6.4 Conflicts and Trade-offs

Between Objectives

• Economic growth vs environmental protection, balance of payments, and inflation-unemployment trade-offs.

Between Policies

• Expansionary vs Deflationary Policies: Impact on AD and economic indicators.
• Interest Rates: Affect investment, trade balance, and wealth distribution.
• Supply-side Policies: Long-term growth vs short-term AD effects.
• Fiscal Deficits: Impact on government spending, taxes, ad inequality.