2.1.1 - The Objectives of Government Economic Policy

Question 1

what are the main macroeconomic objectives of governments?

Answer 1

Balance of payments equilibrium on the current account.
Inflation low and stable.
Growth in GDP.
Full employment.
Equity.
Environmental quality.
Tax and government spending balanced.

Question 2

what is balance of payments on the current account and why is it important?

Answer 2

Exports and imports should be roughly equal.
If there are more imports than exports, UK citizens become indebted to foreigners and this may not be sustainable in the longer term.

Question 3

what is low and stable inflation and why is It important?

Answer 3

Prices on average should rise at a slow sustainable rate. The UK Inflation target is 2%.
This means that the free market price signalling mechanism can operate efficiently, promoting entrepreneurship and economic growth

Question 4

what is growth in GDP and why is it important?

Answer 4

Growth in GDP means that more goods and services are being produced therefore increasing the living standards of citizens, increase life expectancy and improve literacy rates.

Question 5

what is full employment and why is it important?

Answer 5

Full employment means that everyone that wants a job can find one and unemployment is not a major problem ie low unemployment.
It means less government spending on welfare benefits.

Question 6

what is equity and why is it important?

Answer 6

Equity in society in this case means fairness in society. There should be equal opportunities for all; exploitation and discrimination are avoided.

Question 7

why is environmental quality important?

Answer 7

Environmental policies should be aimed at achieving sustainable development. Where possible, environmental degradation and pollution should be minimised, whilst achieving economic growth and rising living standards.

Question 8

what is tax and government spending being balanced and why is it important?

Answer 8

Tax and Government spending should ideally be balanced over the course of the economic cycle. Persistently high levels of Government borrowing could damage economic growth in the longer term.

Question 9

what are the potential conflicts and tradeoffs between the objectives?

Answer 9

• economic growth vs inflation
• economic great vs the current account
• economic growth vs the government budget deficit
• economic growth vs the environment
• unemployment vs inflation

Question 10

explain the tradeofff between economic growth vs inflation.