2.6 macroeconomic objectives and policies

Question 1

what are the 7 macroeconomic objectives?

Answer 1

1. economic growth
2. low unemployment
3. low and stable inflation
4. balance of payment equilibrium on the current account
5. balance govenment budget
6. protection of the environment
7. greater income equality

Question 2

explain economic growth as a macroeconomic objective

Answer 2

• In the UK, the long run trend of economic growth is about 2.5%.
• Governments aim to have sustainable economic growth for the long run.
• In emerging and developing economies, governments might aim to increase economic development before economic growth, which will improve living standards, increase life expectancy and improve literacy rates

Question 3

explain low unemployment as a macroeconomic objective

Answer 3

• Governments aim to have as near to full employment as possible
• They account for frictional unemployment by aiming for an unemployment rate of around 3%
• The labour force should also be employed in productive work

Question 4

explain low and stable inflation as a macroeconomic objective

Answer 4

• In the UK, the government target is 2%, measured by CPI.
• This aims to provide price stability for firms and consumers and will help them make decisions for the long run.
• If the inflation rate falls 1% outside the target, the Governor of the Bank of England has to write a letter to the Chancellor of the Exchequer to explain why this has happened and what the Bank intends to do about it.

Question 5

explain balance of payment equilibrium on the current account as a macroeconomic objective

Answer 5

• This is important to allow the country to sustainably finance the current account, which is important for long term growth

Question 6

explain balance govenment budget as a macroeconomic objective

Answer 6

• This ensures the government keeps control of state borrowing, so the national debt does not escalate.
• This allows governments to borrow cheaply in the future should they need to and makes repayments easier.

Question 7

explain protection of the environment as a macroeconomic objective

Answer 7

• This aims to provide long run environmental stability.
• It ensures resources used are not exploited, such as oil and natural gas, and that they are used sustainably, so future generations can access them too.
• Moreover, it means there is not excessive pollution.

Question 8

explain greater income equality as a macroeconomic objective

Answer 8

• This minimises the gap between the rich and poor.
• It is generally associated with a fairer society