What are the government's macroeconomic objectives, and which policies can it use to meet them?
The main macroeconomic objectives, fiscal policy, monetary policy, supply-side policies, the conflicts between objectives, and the use of policies in different contexts.
An Edexcel A-Level Economics A answer to macroeconomic objectives and policies, covering the main objectives of growth, low inflation, low unemployment and a stable current account, the tools of fiscal, monetary and supply-side policy, and the conflicts and trade-offs between objectives.
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What this dot point is asking
Edexcel wants you to state the government's main macroeconomic objectives, explain the tools of fiscal, monetary and supply-side policy, analyse each on an AD-AS diagram, and evaluate the conflicts between objectives.
The macroeconomic objectives
Fiscal policy
Expansionary fiscal policy works through the multiplier: extra government spending raises incomes, part of which is re-spent. Its limits include time lags (planning and implementation), the risk of crowding out private investment if it raises interest rates, and the effect on the budget deficit and national debt.
Monetary policy
The transmission mechanism runs through borrowing costs, the return on saving, asset prices, confidence and the exchange rate. Monetary policy acts with a lag of up to two years and becomes weak near a zero lower bound, which is why QE was used after 2008 and during 2020.
Supply-side policies and conflicts
Supply-side policies raise productive capacity and shift LRAS right. Market-based policies include tax cuts, deregulation and labour-market reform; interventionist policies include spending on education, training and infrastructure. Their strength is improving several objectives at once (growth, jobs, lower inflation, competitiveness); their weaknesses are long time lags, fiscal cost and uncertain success.
Objectives frequently conflict: boosting growth and employment can raise inflation (the short-run Phillips curve trade-off) and worsen the current account by sucking in imports; cutting a budget deficit can slow growth. Governments must judge which objective matters most in the current context.
Examples in context
- 2020 to 2021 stimulus. The UK combined fiscal policy (furlough scheme costing over bn) with monetary policy (base rate to and bn of QE) to support AD during the pandemic.
- 2022 to 2023 tightening. Facing double-digit inflation, the MPC raised the base rate from to above , illustrating contractionary monetary policy and the growth-versus-inflation conflict.
- Mini-budget of 2022. Unfunded tax cuts spooked bond markets, a real lesson on fiscal credibility and crowding out.
- Apprenticeship levy and HS2. UK supply-side measures (skills and infrastructure) aimed at shifting LRAS right.
Try this
Q1. Explain how a cut in interest rates could increase aggregate demand. [4 marks]
- Cue. Cheaper borrowing and lower returns on saving raise consumption and investment, and a weaker exchange rate boosts net exports.
Q2. Explain one conflict between macroeconomic objectives. [4 marks]
- Cue. Faster growth and lower unemployment can cause higher inflation, or a larger current account deficit as imports rise.
Exam-style practice questions
Practice questions written in the style of Pearson Edexcel exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Edexcel 20194 marksExplain, using an AD-AS diagram, how a cut in the Bank of England base rate from to could affect aggregate demand.Show worked answer →
A short explain question rewarding a chain of analysis and a diagram.
A lower base rate reduces borrowing costs and the return on saving, so consumption (especially on credit and housing) and business investment rise; a lower rate may also weaken sterling, raising net exports. C, I and (X minus M) all rise, shifting AD right, raising real output and the price level on an AD-AS diagram.
Markers reward (1) the transmission mechanism through C, I and net trade, (2) the rightward AD shift, (3) the effect on output and prices.
Edexcel 202315 marksEvaluate the use of supply-side policies, rather than demand-side policies, to improve the long-run performance of the UK economy.Show worked answer →
A 15 mark evaluate question (around 9 KAA, 6 evaluation).
KAA: define supply-side policies (market-based: tax cuts, deregulation, labour reform; interventionist: education, training, infrastructure), explain that they shift LRAS right, raising potential output without inflation, and improving several objectives at once (growth, jobs, lower inflation, competitiveness).
Evaluation: supply-side policies have long time lags, high fiscal cost, uncertain success and possible regressive effects, and do little in a demand-deficient recession where demand policy is needed. Conclude that the best mix depends on context (output gap, fiscal space).
Markers reward LRAS diagrams, UK examples and a supported judgement.
Related dot points
- The components of aggregate demand, the determinants of consumption, investment, government spending and net trade, and the shape and shifts of the AD curve.
An Edexcel A-Level Economics A answer to aggregate demand, covering the four components C, I, G and X minus M, the determinants of consumption and investment, the shape of the AD curve and the factors that shift it, and the role of the marginal propensity to consume.
- Short-run aggregate supply and its determinants, long-run aggregate supply, the Keynesian and classical LRAS curves, and the factors that shift the productive capacity of an economy.
An Edexcel A-Level Economics A answer to aggregate supply, covering the determinants of short-run aggregate supply, the difference between the classical and Keynesian long-run aggregate supply curves, and the factors that shift the productive potential of the economy.
- Actual and potential growth, the causes of short-run and long-run growth, the output gap, the economic cycle, and the costs and benefits of growth.
An Edexcel A-Level Economics A answer to economic growth, covering actual and potential growth, the demand-side and supply-side causes of growth, positive and negative output gaps, the phases of the economic cycle, and the costs and benefits of growth for individuals and the environment.
- Economic growth and real GDP, inflation and its measurement, employment and unemployment, the balance of payments on current account, and the limitations of these indicators.
An Edexcel A-Level Economics A answer to measures of economic performance, covering real and nominal GDP, GDP per capita, the CPI and RPI measures of inflation, the causes of inflation and deflation, the measurement of unemployment, the balance of payments on current account, and the limitations of each indicator.
Sources & how we know this
- Pearson Edexcel A-Level Economics A (9EC0) specification — Pearson Edexcel (2015)