1.7 Macroeconomic policy objectives

Question 1

What are the macroeconomic objectives?

Answer 1

1. Increased economic growth (GDP/output)
2. Increased consumption
3. Stable inflation - 2% target
4. Reduce unemployment
5. Balanced trade on the current account and balance of payments
6. Stable fiscal balance
7. Reduce inequality
8. Sustainable environmental protection

Extra:
Increase standard of living - GNI/capita
Improve well being
Global competitiveness
Public service access

Question 2

How does taxation influence objectives?

Answer 2

Consumption - VAT and income taxes

Inflation - stimulated with AD and taxes

Unemployment - may fall in firms have higher demand, rise if tax cost high

Net exports - corporation tax reduce competition

Growth - stimulating AD

Fiscal balance - tax revenues rise

Equality - progressive tax

Environment - taxing pollution

Question 3

What are some potential conflicts between objectives?

Answer 3

-Employment and inflation - Phillips curve

Economic growth and balance of payments - growth causes more imports to grow faster

Growth and inequality - benefits not evenly distributed

Growth and environment

Growth and inflation - greatest when supply is inelastic

Question 4

What is the conflict bettween economic growth and inflation

Answer 4

Risk of inflation greatest when AS is inelastic

• If an economy suffers high inflation and slow growth, this is staglfation
• Conflict between growth and inflation resolved by supply side policies

This may be illustrated on an LRAS as a rise in AD and output leads to inflation at YFE

Question 5

What is the conflict between growth and balance of payments?

Answer 5

• Consumers have more income so import more - worse trade alance
• Fast growing countries suffer high inflation and worsen price competitiveness
• Businesses import extra raw materials, components and capital equipment.

May be resolved by:
Supply side: labour, r&d and innovation, increased investment
Exchange rate depreciation - exports more price competitive and imports more expensive
-Depends on price elasticity of demand for exports and imports
-Macroeconomic policies keep inflation low relative to competitor countries

Question 6

What is the Phillips curve?

Answer 6

Sloping downward curve demonstrating the trade off between inflation and unemployment - demand for labour is high, firms bid up wages and wages rise - unemployment rises when inflation falls. Suggests inverse relationship between rate of unemployment an percentage change in wages.

The elastic section: When unemployment is high, wage pressures are low - there is plenty of spare capacity to fill job vacancies and so workers can be easily replaced so paid little

Inelastic section: as unemployment falls, labour shortages cause increase in wage inflation and higher labour costs. When an economy is booming so does derived demand for labour and so costs rise. Suppliers raise prices and increase profit margins - workers have more bargaining power so inflation of wages.

Question 7

Why is there a fall in unemployment rate?

Answer 7

Natural unemployment is frictional and structural unemployment

Supply side policies improve occupational mobility, attract more people into an active search for work, reduce the problem of occupational immobility and lift labour productivity.

Policies can lead to fall in natural rate of unemployment, shift the Phillips Curve to the left and a country is able to maintain lower inflation whilst cutting the rate of unemployment. Some economists believe this has caused the curve to flatten

Question 8

Why has the Phillips curve flattened?

Answer 8

• Improved labour mobility and incentives
• Impact of skilled migration
• Reduced worker bargaining power/rise of monopsony employers
• Effect of globalisation and technological change on consumer prices