2.6.1 - Possible macroeconomic objectives

Question 1

Name all the 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

A) Economic growth

Answer 2

● Sustainable economic growth - Is economic growth that meets the needs of the preset, without compromising the ability of future generation to meet their own needs.

● A sustainable long term economic growth rate is around 3 or 4 percent.

Question 3

B) Low unemployment

Answer 3

● The target unemployment rate for the UK is 4-5%

● This is close to the full employment level of labour (YFE)
There will always be a level of frictional unemployment
This makes it impossible to achieve 100% employment.

Question 4

C) Low and stable rate of inflation

Answer 4

● A stable inflation rate is around 2 to 3%.

● Price stability encourages foreign investors and firms to invest. This is due to the fact that they’re able to make **long term decisions knowing that the probability of these decisions won’t change as a result of large decreases or increases in the inflation rate.

● The different causes of inflation (cost push or demand pull) require different policy responses from the Government:
- Demand-side policies ease demand pull inflation.
- Supply-side policies ease cost push inflation.

Question 5

D) Balance of payments equilibrium on current account

Answer 5

● Governments try to ensure that they maintain a balanced budget. If the government’s borrowing gets out of control, then they can accumulate large amounts of debt which will eventually affect the country’s ability to borrow money at a low interest rate. This is why governments may aim to reduce the budget deficit to around 2%, or try to run a budget surplus.

Question 6

E) Balanced government budget.

Answer 6

● The government aim to have a relatively stable current account i.e. not a large deficit. A small current account deficit is not too much of a problem for a government due to the fact that it makes up a very small proportion of the AD value. This is why some countries such as the UK are happy to run a small trade deficit.

Question 7

F) Protection of the environment

Answer 7

● This is needed in order to prevent the depletion of scarce resources such as oil. Without the protection of the environment, future generations may not have access to these resources and therefore future living standards may fall by a large amount.

● In addition to this, governments may aim to reduce pollutions and the emission of fossil fuels in order to prevent the negative externalities associated with this, such as the health problems it causes for people with asthma or the damage it does to wildlife.

Question 8

G) Greater income equality

Answer 8

● Governments will try to avoid high levels of inequality which are associated with unrest amongst citizens as well as other social tensions.