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

The stage at which governments might become concerned about the trends in macroeconomics

Answer 2

National output, unemployment, and inflation

Question 3

Side effects of macroeconomics problems

Answer 3

If inflation is too high = higher interest rates, lower exports, lower savings

Question 4

The changing importance of objectives

Answer 4

the more recent focus on reducing the government budget deficit

Question 5

Developments and current issues in economics

Answer 5

The Global Financial Crisis in 2008
- In the 1990s many ppl bought houses as investments since mortgages were available to everyone
- House prices then fell meaning they weren’t able to pay back their loans which caused housing and mortgage bust
- Market liquidity crisis and credit crunch spread to all credit & financial markets
- Wide economic recession US (no housing, unemployment)
- Recession in most advanced economies (no imports, bank investments)
- Banking crisis led to sovereign debt crisis

Question 6

In the Global Financial Crisis, why did economic recession spread to other countries?

Answer 6

• The US was not buying imports
• Some countries invest in banking from the US (e.g iceland who make money than they spend)

Question 7

Examples of what the UK government spend

Answer 7

Aid
EU
Health
Welfare
Education
Environment
Culture
Housing
Admin business
Transport
Pension
Debt Interest
Defense/safety

Question 8

Index numbers

Answer 8

Used when making comparisons between prices over time
- It starts with a base year (e.g 2012) at an index no. 100
- Percentage increase pushes the index no for that year above 100 and percentage decrease pushes the index no for that year below 100

Question 9

Index number example question

Question 10

Why is protection of the environment important?

Answer 10

leads to increased living standards
- lower pollution = increased health = increased happiness

Question 11

Why is balance of payments equilibrium on current account important?

Answer 11

a reflection of a country’s ability to trade sustainably
- the country can sustainably finance the current account = long time growth

Question 12

Uk’s current balance of payments

Answer 12

8.3% of GDP

Question 13

Importance of greater income equality

Answer 13

income is evenly distributed = higher living standards & more spending = econ growth

Question 14

Inflation of low and stable inflation

Answer 14

if it’s volatile = rising cost of living standards & rising bills, redistribution of wealth e.g debt

Question 15

Importance of low unemployment

Answer 15

Employment = econ growth =
- if there’s high unemployment, there might be spare capacity
- unemployment = decreased skills, decreased mindset/motivation, decreased living standards

Question 16

Importance of a balanced govt budget

Answer 16

Otherwise govt goes into deficit & econ growth goes down

Question 17

Benefits of econ growth

Answer 17

• increased living standards
• increased employment
• fiscal dividend

Question 18

Benefits of econ growth (living standards)

Answer 18

• real GNI per capita = lift ppl out of extreme poverty & improve development outcomes

Question 19

Benefits of econ growth (employment)

Answer 19

sustained growth stimulates jobs & contributes to lower unemployment rates = reduce income inequality

Question 20

Benefits of econ growth (fiscal dividend)

Answer 20

increased econ growth = increased tax revenue & decreased govt spending on unemployment & poverty related welfare benefits

Question 21

How can a policy of higher interest rates lead to an improvement in macroeconomic performance?

Answer 21

• higher interests rates control inflationary pressures
• higher interest rates = higher returns for savers & retirees

Question 22

How can higher interest rates control inflationary pressure?

Answer 22

• e.g USA Fed Reserve has been raising rates (from 0.25%-2.5%) since unemployment is very low
• low inflation = macro stabiltiy = keeps domestic economy competitive = reduce business uncertainty

Question 23

Evaluation of higher interest rates control inflationary pressure

Answer 23

• higher interest rates = inflow of hot money = currency appreciatioin

Question 24

How can higher interest rates lead to higher return for savers?

Answer 24

• rise in nominal interest rates = improve returns for savers = helps repay debt = act as a buffer against macro uncertainty = increase flow of deposits into commercial banks = create more liquidity to support a rise in bank lending to finance bsiness investment = increase LRAS

Question 25

Evaluation of higher interest rates lead to higher return for savers?

Answer 25

• there is no guarantee commerical banks will lend out more if returns to savers improve
• a rise in interest rates is likely to lead to a contraction in bank lending = borrowing more expensive (especially for smaller businesses & households who have become dependent on expensive unsecured credit)
• risk is that a sharp rise in interest rates could cause a growth slowdown