2.6.1 - Possible Macroeconomic objectives and policies

Question 1

Name the seven Macroeconomic objectives

Answer 1

. Economic growth

. Low unemployment

. Low and stable rate of inflation

. Balance of payments equilibrium on current account

. Balanced government budget

. Protection of the environment

. Greater income equality

Question 2

Explain Economic Growth

Answer 2

. Economic Growth needs to be high and sustainable

. Sustainable economic growth means a rate of growth which can be maintained without creating other significant economic problems such as sacrificing the needs of future generations

. Unsustainable economic growth is when the actual level of GDP exceeds the trend line GDP. This is when there is a positive output gap in the trade cycle or when real output is greater than LRAS.

. There needs to be economic growth without high inflation or environmental damage

Question 3

Explain Low unemployment

Answer 3

. Government try to keep unemployment as low as possible without there being inflationary pressure in the economy

. Impossible to have zero unemployment due to frictional and seasonal unemployment

. Higher unemployment would increase tax revenue and reduce welfare benefits to the unemployed and those on low incomes

Question 4

Explain Low and Stable Inflation

Answer 4

. The Bank of England’s Monetary Policy Committee (MPC) sets the inflation target at 2% (+/-1%)

. There needs to low, stable, positive inflation

. Government tries to avoid deflation as it is being linked to a recession or negative economic growth. Deflation would reduce investment and consumption in the short run because they believe prices will be ever cheaper in the future.

. High inflation is also undesirable as it causes low AD

Question 5

Explain Balance of payments equilibrium on current account

Answer 5

. Governments aim for the balance of payments on the current account to be in balanced

. There needs to balance between the value of imports of goods and services and the value of exports of goods and service

. Trade deficit can have negative consequences

. Trade surplus may also have negative consequences

Question 6

Explain Greater Income equality

Answer 6

. Income is distributed by taxation on higher earners and businesses, which is then distributed to those on low incomes

. Minimum wages or maximum prices on certain goods are set to increase economic development

. Healthcare and education can also be made free to every citizen to increase economic development

. One argue that since the marginal propensity to consume is greater at lower levels income, equality through distribution of income would increase the level of consumption in the economy, shifting AD to the right and thus leads to economic growth.

However, one may argue that inequality is beneficial as it increases the incentive to work longer, be more productive and take economic risks. It would also increase innovation and thus create new jobs due to new jobs.

Question 7

Explain protection of the environment

Answer 7

Aim to provide long run environmental stability

Resources not exploited, such as oil and gas so that future generations can use them as well. This means lead to sustainable economic growth for the long term

Question 8

Explain balanced government budget

Answer 8

The government tries to balance government budget by making sure expenditure does not exceed revenue for taxes.

A budget deficit means that borrowing will take place from countries, which means loans will have to be paid back with interest.

This will hinder economic growth in the long run and may lead to tax increases to pay the loans. Government spending will also fall.