macroeconomic aims
What are the four main macroeconomic aims of most governments?
Economic Growth,Low Unemployment,Price Stability,Balanced Trade
What are the two primary tools of fiscal policy?
The two tools are government spending and taxation.
What is the main tool central banks use to control inflation?
Central banks mainly use interest rates to control inflation.
Define inflation and deflation in simple terms.
Inflation is rising prices; deflation is falling prices.
Which policy (fiscal or monetary) is typically faster to implement?
Monetary policy is faster.
Why might a government tolerate slightly higher inflation to reduce unemployment?
Short-term inflation can stimulate spending and hiring (as per the Phillips Curve trade-off), boosting economic activity until unemployment falls.
How does expansionary fiscal policy combat a recession?
In a recession, spending more or taxing less puts money in people’s hands to boost demand.
How do lower interest rates affect consumer borrowing and business investment?
Lower rates make loans cheaper, so people and businesses spend/invest more.
What is the difference between cost-push and demand-pull inflation?
Demand-pull inflation comes from too much spending; cost-push comes from higher production costs.
How could a government use both fiscal and monetary policies to fight stagflation?
Fight stagflation with fiscal cuts/spending and tight money.
Explain how pursuing economic growth could conflict with environmental sustainability.
Economic growth often harms the environment by increasing pollution, depleting resources.
Why might high government debt limit future fiscal policy options?
High debt means less room for future spending or tax cuts without risking crisis.
Explain the limitations of monetary policy when interest rates are near zero (liquidity trap).
Near-zero rates leave central banks with little power to stimulate the economy further.
Why is deflation considered dangerous for an economy?
Deflation makes people delay spending and debts harder to repay, worsening recessions.
Why might a strong currency make it harder to control inflation via monetary policy?
A strong currency lowers import prices but hurts exports.
Evaluate the trade-offs between income equality and economic efficiency.
More income equality may reduce incentives to work or invest, hurting efficiency.
Compare the effectiveness of tax cuts vs. increased government spending in stimulating growth.
Tax cuts may act faster, but spending (e.g., on infrastructure) can have longer-lasting benefits.
Why might raising interest rates to fight inflation also risk causing a recession?
Raising rates slows inflation but can also reduce spending and trigger a downturn.
How can hyperinflation destabilize a country’s financial system
Hyperinflation destroys savings and trust in money, causing economic chaos.
Discuss how supply-side policies complement fiscal/monetary measures.
Supply-side policies (e.g., deregulation) boost growth potential, aiding fiscal/monetary goals.
How can globalization complicate a government’s ability to achieve all its macroeconomic aims simultaneously?
Globalization ties economies together, making it harder to control inflation, jobs, or growth independently.
Discuss the concept of "crowding out" and its impact on private investment.
Crowding out happens when government borrowing raises interest rates, reducing private investment.
Analyze how quantitative easing (QE) works as an unconventional monetary tool.
QE injects money into the economy by buying bonds when rates are already near zero.
Evaluate the argument that moderate inflation (2-3%) is better than zero inflation.
Moderate inflation encourages spending and gives central banks room to cut rates if needed.
In the long run, inflation is always a monetary phenomenon. Critically assess this statement.
Friedman’s view means inflation ultimately depends on money supply growth, not short-term factors.