3.2.1 Measurement Of Macroeconomic Policy

Question 1

What are the 4 primary macroeconomic objectives?

Answer 1

1. STABLE balance of payments
2. SUSTAINABLE economic growth
3. PRICE STABILITY — inflation 2%
4. UNEMPLOYMENT — less than 3%

Question 2

What are the 3 Government Policies?

Answer 2

1. Fiscal policy i.e. tax

Government spending and taxation to achieve policy objectives

2. Monetary policy i.e. interest rates

The government and its agent the BofE, using interest rates and monetary instruments to achieve policy objectives

3. Supply-side policy i.e. labour market

Question 3

Define inflation + its target rate

Answer 3

Sustained rise in price levels (target rate 2%)

Question 4

Define deflation

Answer 4

Persistent fall in average price level (negative inflation rates)

Question 5

Define disinflation

Answer 5

Rate of inflation is falling but is still positive

Question 6

What are lead indicators?

Answer 6

They are what provide information about the future state of the economy
i.e. surveys of consumer and business confidence

Lead examples:

-consumer confidence

Question 7

What are lag indicators?

Answer 7

They provide information about past and present economic performance
i.e. economic growth

Lag examples:

• HDI
• GDP per capita
• retail prices

Question 8

What are the 4 types of GDP, and how can they be defined?

Answer 8

1. Nominal GDP:
   Value of GDP without being adjusted for inflation
2. Real GDP:
   Value of GDP adjusted for inflation
3. GDP per capita:
   GDP / INFLATION
4. Total GDP:
   Combined monetary value of all goods and services produced within a countries borders during a specific time period

Question 9

Name the 2 methods of measuring unemployment in the UK

Answer 9

1. Claimant Count

Record of claimed unemployment related benefits

2. Labour Force Survey

Quarterly sample survey of households in the UK, providing info about residents personal circumstances

Question 10

Is deflation or inflation worse for an economy? Why?

Answer 10

Deflation is worse than inflation, as:

It discourages spending - ‘things would always be cheaper tomorrow so save until then’.

Inflation encourages spending which drives up inflation even further (driven by demand) - people will demand pay rises to afford higher living costs.

Debt becomes more expensive

Unemployment rises

Question 11

What does CPI stand for and what does it measure?

Answer 11

Consumer Prices Index

Official measure used to calculate rate of consumer price inflation in the UK

Calculates average price increase of a basket of 700 different consumer goods and services

Question 12

What is RPI?

Answer 12

Older measure used to calculate rate of consumer price inflation in the UK

Question 13

Define Balance of Payments (BOP)

Answer 13

A record of all the currency flows into and out of a country in a particular time period

Question 14

Define CURRENT ACCOUNT of the balance of payments

Answer 14

Measures all of the currency flows into and out of a country in a particular time period in payment for exports and imports, together with income and transfer flows

Question 15

What is the balance of trade? Difference between a deficit and surplus?

Answer 15

Balance of trade:
Difference between money value of a country’s imports and its exports.
BOT is the largest component of a country’s BOP on current account

Surplus: Exports > Imports

Deficit: Exports < Imports

Question 16

What is the condensed list of measurements for an economies performance?

Answer 16

• real GDP
• real GDP per capita
• CPI
• RPI
• measures of unemployment
• productivity
• BOP
• real national income

Question 17

What is the ‘basket of goods and services’?

Answer 17

A basket of goods represents consumer spending and is used to track changes in the prices of consumer goods and services over time.

Question 18

What are some potential conflicts between the macro objectives?

Answer 18

• economic growth vs inflation
  Growth is likely to experience inflationary pressures on the average PL; especially true when there is a positive output gap and AD increases fast
• economic growth vs current account
  During growth C increases (import more) which worsens the current account deficit
• economic growth vs budget deficit
  Reducing a budget deficit requires less expenditure and more tax revenue which leads to a drop in AD (indicates less economic growth)
• economic growth vs the environment
  Growth is accompanied by degradation due to negative externalities i.e pollution and usage of non-renewables
• economic growth vs inflation
  As economy grows, unemployment drops and wages increase due to more jobs being created. Leads to higher spending and hence PL

Question 19

What are index numbers used for?

Answer 19

Used to make comparisons between years, and to measure the magnitude of change over time.
A base year is used and compared to other years (value of 100)

I.e. 2015 is the base year, if inflation has risen by 5% between 2015-18, the index number for 2018 will be 105