Macroeconomic Policies in a Global Context

Macroeconomic Policies in a Global Context

Courses Info

Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes 

Main Policies which the Government may use:

  • Fiscal Policy
  • Monetary Policy
  • Supply Side Policies
  • Exchange Rate Policy
  • Direct Controls – e.g. minimum / maximum prices, quotas, regulation

Measures to reduce Fiscal Deficits and National Debts

  • Increase taxes and reduce spending – the government can generate more revenue by increasing taxes and reducing expenditure; ultimately, this should held to reduce the fiscal deficit. However, the implementation of higher taxes is likely to result in less growth, greater income inequality and reduced living standards
  • Automatic Stabilisers – the government could rely on the use of Automatic Stabilisers to encourage the economy to grow; in the long-run, the proportion of national debt / fiscal deficit as GDP will fall
  • Default their loans – in extreme cases where the debt and expenditure is excessive, the government can default their loans if they are unable to repay it back

Measures to reduce poverty and inequality

  • Implementation of Supply Side Policies – improving the quality of education and training can provide the poor with better chance to secure a brighter future, reducing inequality
  • Progressive Tax System – this type of tax system aims to reduce the income inequality by taxing the rich more and the poor less
  • Inheritance Tax – by enforcing Inheritance Tax, wealth inequality will be reduced as less money can be passed from one generation to the next
  • National Living Wage – increasing the National Minimum Wage or enforcing a National Living Wage ensures each worker receives the minimum needed to afford essentials
  • Measures to reduce unemployment
  • Providing more Benefits and Transfer Payments – means-tested benefits provide those on a low income with help so that they can attain the minimum standard of living
  • Government can provide free goods / services – e.g free healthcare, state-funded schools etc provide everyone with equal opportunities and access to services that they may not be able to afford
  • Government can reduce wage differentials – national minimum wage provides workers aims to improve the income of the poor, whereas maximum wages will reduce the income of the rich

Changes in Interest Rates and Money Supply

  • Central Bank – they have the ability to change interest rates and the monetary supply in an attempt to control demand-pull inflation, or due to other global issues.
  • Quantitative Easing – this concept makes it easier and cheaper for businesses to borrow from banks. Central banks buy securities from financial institutions to help increase the money supply
  • Quantity Theory of Money – this concept suggests that quantitative easing is likely to cause inflationary pressures to arise, since there is a proportionate and direct relationship between the money supply and price level

International Competitiveness

  • Supply Side measures – improving the quality of education / training can help to promote competition by forcing firms to be more efficient. Supply Side measures may also involve the use of taxes and deregulation to improve productivity and flexibility, increasing intEernational competitiveness
  • Exchange Rate Policies – these can be used to control inflation, and achieve macroeconomic stability. Countries can devalue or increase the value of their currency to reduce / increase exports

External Shocks in the Global Economy

External Shocks in the Global Economy can arise through different forms:

  • A financial crisis – decreasing the confidence in the banking industry
  • Commodity Prices – there may be a sudden increase or decrease in commodities or global oil
  • Exchange Rates – changes in the exchange rate can cause inflation or a fall in economic growth
  • Asset Price Bubbles – a burst in the asset price bubbles will reduce investor confidence, cause businesses to collapse and could result in higher levels of unemployment
  • Infrastructure – severe weather conditions may cause damage to infrastructure
  • Political factors – wars, terrorist attacks and global conflicts will worsen the state of the economy

Measures to control Global Companies’ operations

  • Regulation of Transfer Pricing – this ensures global companies pay a fair amount of tax in each of the countries they operate in. It also prevents firms from engaging in tax avoidance

Problems policymakers are faced with when applying policies

  • Inaccurate Information – forecasts which are made to predict future inflation rates or interest rates can often be inaccurate. This may propose false assumptions and makes it harder for the government to see things holistically
  • External Shocks – external shocks can be difficult to predict and control, making it harder for the government to prepare when faced with a negative situation
  • Risks and Uncertainties – since the government cannot predict the future, it is harder for them to allocate budgets needed for different sectors of spending. Risks arise when future events occur with measurable probability. However uncertainty is present it is difficult to predict the likelihood of future events


Quick Fire Questions – Knowledge Check

1. Identify five main policies the government may use (5 marks)

2. Explain three measures to reduce Fiscal Deficits and National Debts (6 marks)

3. Identify and explain six measures to reduce poverty and inequality (12 marks)

4. Identify the role of a Central Bank (2 marks)

5. Define ‘Quantitative Easing’ (2 marks)

6. Define ‘The Quantitative Theory of Money’ (2 marks)

7. Explain two ways the government can increase International Competitiveness (4 marks)

8. Identify and explain six forms of External Shocks in the economy (12 marks)

9. Explain a measure to control Global Companies’ operations (2 marks)

10. Identify and explain three problems policymakers face when applying policies (6 marks)


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