Macroeconomic Policies

This Activity encourages you to look at a series of key economic data and to make some judgements about the policies that might be appropriate as a result.

The government and the Bank of England will use a variety of key data in determining policy direction. The biggest problem is in deciding how significant the information is in relation to the desired outcomes and the fact that many of the desired outcomes are conflicting - a rise in inflation may be a side effect of lowering unemployment, for example. The government, therefore, has to consider 'trade-offs'.

What are your priorities - would reducing poverty and homelessness be high on the list and what would be the cost of going some way to solving such problems?

A trade-off is a situation where a decision has to be made which may bring some benefit, but which involves the sacrifice of some benefits elsewhere. The problem of trade-offs is very important. Despite what some politicians might claim, it is simply not possible to 'do' everything; this is where judgements have to be made about priorities.

To give you an extreme example of such decisions, during the 1990s, the United Nations imposed sanctions on Iraq following the first Gulf War in 1991. The sanctions were to be in place until Saddam Hussein proved that he had destroyed his weapons of mass destruction. The benefit, if the policy worked, was that a major threat would have been removed. However, in imposing economic sanctions, hundreds if not thousands of ordinary Iraqis died as a result of a lack of food, medicine and clean water. Madeleine Albright, the then US Secretary of State at the State Department, said in an interview that she thought the cost in terms of the lives lost was worth it in the long run if it meant Saddam ceased to be a threat.

Your Task

Your task therefore is to consider the following:

Assess the current situation with regard to the economy - what is likely to happen to the government's key economic targets and why?
Consider what non-economic objectives you are going to prioritise and why.
Decide on what direction your policies are going to take. You must make a decision about the direction of interest rates (monetary policy), tax and spending of the government (fiscal policy) and what your supply side objectives are.
You must analyse the possible effect of the policy changes you are making on the key economic targets and your non-economic targets. You must also make some comment as to the likely strength of the impact on these targets - are your changes going to have major effects or minor effects and why? This will help you to be able to assess the likely trade-offs in your policies.
In analysing the effects of your policy changes, you must use aggregate demand and aggregate supply diagrams to illustrate the points you are trying to make.
Write a letter to a national newspaper summarising the main changes and their impact and justifying the decisions you have made.

Extension Activities

Try going to the Virtual Economy(http://www.bized.co.uk/virtual/economy/model/) where you can use our model to identify the impact of changes in tax decisions on key economic targets and on families.
There are further opportunities to look at key economic data and guides on the analysis of such data in the Key Economic Data section.(http://www.bized.co.uk/dataserv/ked/index.htm)

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