2.6 Introduction to Macroeconomic Objectives Flashcards
Define what is meant by macroeconomic objectives
Where the government aim to create economic stability and remain on the long-term growth rate
Define the term macreconomics
The branch of economics concerned with large-scale or general economic factors, such as interest rates and national productivity
What are the 4 macroeconomic objectives?
- Stable Inflation
- Falling Unemployment
- Economic Growth
- Balance of Payments
What is the target inflation rate?
2%
How is inflation controlled by the government?
The Bank of England change the interest rate to keep it at 2%
Why does unemployment mean the economy is not working at its full capacity?
Labour is a factor of production therefore not all factors are being used to their full potential
How is economic growth measured?
GDP change over time
Define aggregate supply
The total quantity of output in the economy at a given price level
Define aggregate demand
The total demand for goods and services in the economy over a period of time
Where on the AS graph is there spare capacity in the economy?
On the left
Where on the AS graph are all resources fully available?
On the right
What is fiscal policy?
The use of government spending through taxation and borrowing to influence the pattern of economic activity
What is the formula for AD?
C + I + G + (X - M)
Give 2 general advanatges of fiscal policy
- Has a small time lag
- Can also boost AS
What economic measure does fiscal policy have an effect on?
Aggregate Demand
Give 3 general disadvantages of fiscal policy
- Causes Demand-Pull inflation
- Government spending causes a budget deficit
- Results may not be as expected
Give an evaluation point on why fiscal policy may not be good in certain circumstances
Will not boost GDP if the economy in near full capacity
What is monetary policy?
Changes in the interest rate, the supply of money and credit and exchange rates to influence economic activity
What does an increase in the interest rate cause in terms of the exchange rate of the domestic currency?
Appreciation
What does a decrease in the interest rate cause in terms of the exchange rate of the domestic currency?
Depreciation
What is meant by exchange rate policy?
Manipulating the exchange rates to help them meet macroeconomic objectives
How do the government have control of the exchange rates?
Through the bank of England who set the interest rate
What is meant by a ‘floating exchange rate’?
Where the exchange rate is left to its own devices to be decided by supply and demand
Why do the government not really have control of the interest rate?
Because it is controlled by the BOE who are a separate entity
