2.6.1 Possible macroeconomic objectives

Question 1

Possible macroeconomic objectives

Answer 1

a) Economic growth
b) Low unemployment
c) Low and stable rate of inflation
d) Balance of payments equilibrium on current account
e) Balanced government budget
f) Protection of the environment
g) Greater income equality

Question 2

Target rate for economic growth in most countries

Answer 2

2-3%

This is considered to be sustainable growth.
Growth at this rate is less likely to cause excessive demand-pull inflation.

Question 3

Economic growth has positive impacts on…

Answer 3

• Confidence
• Consumption
• Investment
• Employment
• Incomes
• Living standards
• Government budgets

Question 4

The target unemployment rate for the UK

Answer 4

4-5%

• This is close to the full employment level of labour. | There will always be frictional unemployment in an economy, making it impossible to achieve 100% employment.

Question 5

Relationship between real GDP and unemployment.

Answer 5

Unemployment is inversely proportional to real GDP.

• When GDP increases, unemployment falls.
• When GDP decreases, unemployment rises.

Question 6

Protection of the environment

Answer 6

Some environmental aims for the UK government include:

• A focus on sustainability
• The reduction of negative externalities of production.
• 100% energy from renewable sources by 2035.

Question 7

How do demand-side and supply-side policies affect inflation?

Answer 7

• Demand-side policies ease demand-pull inflation.
• Supply-side policies ease cost-push inflation.

Question 8

What is the target for inflation?

Answer 8

2% (using the CPI).

A low rate of inflation is desirable as it is a symptom of economic growth.

Question 9

Why is low and stable inflation important?

Answer 9

It allows firms to confidently plan for future investments and offers price stability to consumers (improving consumer confidence).

Question 10

The balance of payments

Answer 10

A record of all the financial transactions that occur between it and the rest of the world.

Question 11

Government aim for the balance of payments

Answer 11

Governments aim for a balance of payments equilibrium on the Current Account:

• If exports < imports, it will create a current account surplus.
• If imports > exports, it will create a current account deficit.

Question 12

Why do governments aim to run a balanced budget?

Answer 12

• If expenditure > revenue, then there is a budget deficit.
• Any deficit has to be financed through public sector borrowing.
• Any borrowing is added to the public sector debt (government debt).

Question 13

What happens if a country’s government debt becomes too high?

Answer 13

If government debt becomes too high (expressed as a % of GDP), then lenders begin to lose confidence in the government’s ability to repay the debt.

The government then has to raise the interest rate it offers to lender which makes borrowing more expensive.

Question 14

Negative impacts of reducing the deficit in an economy

Answer 14

It is typically done by the use of austerity measures.

• Increasing taxes and cutting government expenditure.

Question 15

Why is the reduction of income inequality a priority for governments?

Answer 15

High levels of income inequality create social unrest.

Question 16

How is income inequality measured?

Answer 16

The Gini Coefficient.