2.6.1- Possible macroeconomic objectives

Question 1

What is balanced growth

Answer 1

In macroeconomics, balanced growth occurs when output and the capital stock grow at the same rate. Also refers to balanced expansion of components of aggregate demand

Question 2

Define budget balance

Answer 2

The annual balance between government spending and tax revenues. When G>T, there is a budget deficit and when G<T, there is a budget surplus

Question 3

Define price stability

Answer 3

Occurs when there is a low positive inflation rate of between 1-3% and price changes that do occur have little impact on day-to-day decisions of people and businesses.

Question 4

Define unemployment rate

Answer 4

The unemployment rate is the proportion of the economically active population who are unemployed.

Question 5

Define income inequality

Answer 5

The degree to which income is distributed unequally in an economy or population; income inequality can be illustrated using a Lorenz Curve and measured using the Gini coefficient.

Question 6

State 7 possible macroeconomic objectives

Answer 6

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 7

Why is economic growth an important macroeconomic objective

Answer 7

• 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 markets and developing economies, governments might aim to increaseeconomic development before economic growth, which will improve living
  standards, increase life expectancy and improve literacy rates.

Question 8

Why is low unemployment an economic objective

Answer 8

• Governments aim to have as near to full employment as possible without there beign inflationary pressure.
• They account for frictional/seasonal unemployment by aiming for an unemployment rate of around 3%.
  -The labour force should also be employed in productive work - reduces welfare benefits and increases tax revenue
• production is maximised and living standards raised

Question 9

Why is a low and stable rate of inflation a macroeconomic objective

Answer 9

• In the UK, the government inflation target is 2%, measured with CPI.
• This aims to provide price stability for firms and onsumers, and will help them make decisions for the long run.

Question 10

Why is balance of payments equilibrium on the current account an macroeconomic objective

Answer 10

• Governments aim for the current account to be satisfactory, so there is not a large deficit ( near to equilibrium)
  A balance of payments equilibrium on the current account means country can sustainably finance the current account (important for long term growth)

Question 11

How do countries in a current account surplus/deficit usually get on economically?

Answer 11

persistant surplus - stronger economy
persistent deficit - struggling

Question 12

Why is balanced government budget an important macroeconomic objective

Answer 12

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 repayment easier

Question 13

Why is protection of the environment a macroeconomic objective

Answer 13

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
- damage/pollution to enviro
- depletion of finite resources

Question 14

Why is income equality a macroeconomic objective

Answer 14

Income and wealth should be distributed equitably, so the gap between the rich and poor is not extreme and poverty is reduced. It is generally associated with a fairer society, therefore increasing social welfare which the government
prioritises
- high income peeps save and low income earners spend so income redistribution raises consumer spending, as and output

• not too much equality tho higher wages act as incentive to work harder spending by higher earners creates jobs for others

Question 15

Why does redistribution of income benefit the economy

Answer 15

Higher earners tend to save more of the money whilst low earners tend to spend most or all of it - so income redistribution will increase overall consumer spending and raise AD, output and employment