4.2 - The Macroeconomic Aims of Government

Question 1

The five macroeconomic aims

Answer 1

1. Economic growth
2. Low unemployment
3. Price stability / low inflation
4. Balance of payments stability
5. Redistribution of income

Question 2

Economic growth

Answer 2

An increase in the gross domestic product (GDP), the amount of goods and services produced in the economy, over a period of time

Question 3

Price stability

Answer 3

A condition of low, not zero but stable inlfation
* usually set at around 2%

Question 4

Low unemployment / full employment

Answer 4

Low numbers in an economy under which people willing and able to work, and looking for work, are unable to find any

Question 5

Balance of payments stability

Answer 5

A state in which:
1. economies export (sell) many of their products to overseas residents, and receive income and investment from abroad
2. they import (buy) goods and services from other economies, and make investments in other countries

Question 6

Surplus in BoP

Answer 6

Exports > Imports

Question 7

Deficit in BoP

Answer 7

Exports < Imports

Question 8

Income redistribution

Answer 8

The government will redistribute incomes from the rich to the poor to reduce the inequality of income among its citizens

Question 9

How is economic growth achieved? (3)

Answer 9

• Investing in infrastructure
• Policies that affect productivity and labour force participation
• Policies that encourage capital accumulation and technological change

Question 10

GDP

Answer 10

private consumption + investment + government spending + (exports - imports)

Question 11

Affects of economic recessions (name 2)

Answer 11

• fall in employment, incomes and living standards of the people
• fall in the tax revenue the govt. collects from goods and services and incomes: lead to a cut in govt. spending
• fall in the revenues and profits of firms
• low investments: people won’t invest in production as economic conditions are poor and they will yield low profits

Question 12

Negative affects of quickly rising prices (name 2)

Answer 12

• reduces people’s purchasing powers: people will be able to buy less with the money they have now than before
• causes hardship for the poor
• increases business costs
• makes products more expensive than products of other countries with low inflation: less competitive exports

Question 13

Affects of high level of unemployment (3)

Answer 13

• the total national output will fall
• government will have to give out welfare payments (unemployment benefits) to the unemployed: increasing public expenditure while income taxes fall – causing a budget deficit
• large unemployment causes public unrest and anger towards the government

Question 14

Foreign currency

Answer 14

the currency used by a foreign country as its recognized form of monetary exchange (money from a country that is not your own)

Question 15

What affects does high inequality have? (2)

Answer 15

• widening inequality means higher levels of poverty
• poverty and hardship restricts the economy from reaching its maximum productive capacity

Question 16

Economic growth vs. Stable prices (inflation)

Answer 16

1. Increasing economic growth causes the economy to move closer to full employment
2. Prices for remaining resources are bid up due to greater income leading to inflation which may outpace the target inflation rate of 2%

Question 17

Economic growth vs. Environmental sustainability

Answer 17

1. Economic growth often increases pollution, negative externalities & the depletion of non-renewable resources
2. The higher the growth, the faster the depletion

Question 18

Economic growth vs. Redistribution of income (inequality)

Answer 18

During periods of high economic growth, the profits the owners of the factors of production receive are disproportionate: an increase in workers’ wages leading to greater inequality

Question 19

Economic growth vs. Balance of payments

Answer 19

Economic growth usually leads to higher incomes which leads to an increase in imports by households thereby worsening the current account balance

Question 20

Low unemployment vs. Price stability (low inflation)

Answer 20

1. Low rates of unemployment will boost incomes of businesses and workers
2. This rise in incomes, mean higher demand and consumption in the economy, which causes firms to raise their prices
3. Resulting in inflation.

Question 21

Low unemployment vs. Balance of payments

Answer 21

1. When unemployment is low, incomes are higher
2. Imports increase which worsens the current account balance
3. With low unemployment, wages tend to increase which increases costs of production for firms
4. If they increase their prices, then the level of exports is likely to fall