4.2 The macroeconomic aims of government

Question 1

What are the five general macroeconomic aims of government? [1]

Answer 1

• Economic growth
• Low unemployment
• Stable prices
• Balance of payments stability
• Redistribution of income and wealth [1]

Question 2

Define economic growth. [2]

Answer 2

Economic growth is the annual increase in the level of national output [1], which is the annual percentage change in gross domestic product [1].

Question 3

How can economic growth be shown in a PPC diagram? [2]

Answer 3

It is shown by an outward shift of the curve [1], this means there is an expansion in the economy’s productive capacity [1].

Question 4

How does unemployment occur? [3]

Answer 4

Unemployment occurs when people are willing and able to work [1], and actively seeking employment [1], but are unable to find work [1].

Question 5

Why is high employment important? [2]

Answer 5

Because higher employment leads to greater GDP [1], which represents greater efficiency in the use of the economy’s resources [1].

Question 6

How is the unemployment rate calculated? [1]

Answer 6

It is calculated by the formula of number of unemployed people divided by the number of the total workforce times 100. [1]

Question 7

Define inflation. [2]

Answer 7

Inflation is the sustained rise in the general price level in an economy [1], it is measured by using the Consumer Price Index (CPI) [1].

Question 8

What is the Consumer Price Index? [2]

Answer 8

It is the change in prices of a representative basket of goods and services [1] consumed by the average household in the economy [1].

Question 9

Define balance of payments stability. [2]

Answer 9

The balance of payments stability is a financial record of a country’s transaction with the rest of the world [1] for a given time period, usually one year [1].

Question 10

Why is it bad for a country to have a large balance of payments deficit? [2]

Answer 10

Because it suggests that the country’s is uncompetitive in international markets [1], which it will have a negative impact on economic growth and standards of living [1].

Question 11

Define redistribution of income. [1]

Answer 11

Redistribution of income refers to the macroeconomic aim of achieving greater equality in the distribution of income in an economy [1].

Question 12

What measure can a government do in order to redistribute income? [1]

Answer 12

A measure is to make taxation such as income tax [1] to redistribute income to help poor people.

Question 13

What are the two conflicts of having full employment? [2]

Answer 13

Stable prices [1] and balance of payments stability [1].

Question 14

What are the two conflicts of having economic growth? [2]

Answer 14

Stable prices [1] and balance of payments stability [1].

Question 15

What are the two conflicts of having stable prices? [2]

Answer 15

Full employment [1] and economic growth [1].

Question 16

What are the two conflicts of having balance of payments stability? [2]

Answer 16

Full employment [1] and economic growth [1].

Question 17

Why does full employment conflict with stable prices? [2]

Answer 17

More people are employed and they have more money to spend [1], therefore inflation pressure increases [1].

Question 18

Why does full employment conflict with balance of payments stability? [3]

Answer 18

More people are employed and they become wealthier [1], they tend to buy imports [1] and therefore the country’s export becomes less competitive [1].

Question 19

Why does economic growth conflict with stable prices? [3]

Answer 19

If a country wants to stimulate economic growth by reducing the interest rate, people will have more money to spend [1], and borrowing is cheaper [1], which causes demand-pull inflation [1].

Question 20

Why does economic growth conflict with balance of payments stability? [3]

Answer 20

There are higher consumer spending [1], therefore consumption rises and expenditure on imports increases [1], which cause a deficit in the country’s balance of payments [1].