4.2.1.1_-_The_objectives_of_government_economic_policy

Question 1

List the four main macroeconomic objectives set out by the government

Answer 1

• Sustainable economic growth
• Minimising unemployment
• Price stability( stable inflation rate)
• Stable balance of payments on the current account (at equilibrium exports = imports)

// It is never possible for the UK government to achieve all macro objectives

Question 2

What do the four main macroeconomic objectives aim to achieve?

Answer 2

Macro stability

Question 3

What is macroeconomics?

Answer 3

The study of national, international and global markets. Looks at the policies used by governments to achieve macro economic objectives

Question 4

What is a policy objective?

Answer 4

A target or a goal that a government wished to achieve or hit

Question 5

Explain what sustainable economic growth looks is for the UK

Answer 5

The total supply of goods/services to grow at the same rate as total demand i.e. sustainable increase in GDP.
The long run trend of economic growth is about 2.5%. Governments aim to have sustainable economic growth for the long run.

Question 6

What is GDP?

Answer 6

Gross domestic product is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.

Question 7

How is economic growth objectives different to the UK in emerging markets and developing economies?

Answer 7

In emerging markets and developing economies, governments might aim to increase economic development before economic growth, which will improve living standards, increase life expectancy and improve literacy rates.

Question 8

How do governments look at minimising unemployement?

Answer 8

Governments aim to have as near to full employment as possible. They account for frictional unemployment by aiming for an unemployment rate of around 3%. The labour force should also be employed in productive work.

Question 9

What is full employment?

Answer 9

Everyone who wants a job has on, plus some people where there is no long-term unemployment

Question 10

What is CPI?

Answer 10

The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.

Question 11

What is the government inflation rate target in the UK?

Answer 11

2%, measured with CPI

Question 12

What does the government inflation rate target in the UK aim to do?

Answer 12

To provide price stability for firms and consumers which will help them make decisions for the long run.

Question 13

What does the UK government aim for the current account to be?

Answer 13

Governments aim for the current account to be satisfactory, so there is not a large deficit. This is usually near to equilibrium

Question 14

What does a deficit on the current account mean?

Answer 14

A deficit on the current account means that the value of imports is greater than the value of exports.

Question 15

What does a surplus on the current account mean?

Answer 15

A surplus on the current account means that the value of imports is less than the value of exports.

Question 16

What are the two main additional objectives of macroeconomic policy?

Answer 16

Balanced government budget
Greater income equality

Question 17

What does a balanced government budget mean?

Answer 17

It ensures the government keeps control of state borrowing, so the national debt does not escalate. This allows governments to borrow cheaply in the future should they need to, and makes repayment easier.

Question 18

What does greater income equality mean?

Answer 18

income and wealth should be distributed equitably, so the gap between the rich and poor is not extreme. It is generally associated with a fairer society.

Question 19

How does time affect the importance of macroeconomic polices

Answer 19

The importance of each objective changes over time. i.e. SR and LR

Question 20

What are the potential conflicts and trade offs between the key macroeconomic objectives?
// five conflicts

Answer 20

• Economic growth vs inflation
• Economic growth vs the current account
• Economic growth vs the government budget deficit
• Economic growth vs the environment
• Unemployment vs inflation

// Generally occurs in the short run

Question 21

What are the potential conflicts and trade offs between economic growth and inflation?

Answer 21

A growing economy is likely to experience inflationary pressures on the average price level. This is especially true when there is a positive output gap and AD increases faster than AS.

Question 22

What are the potential conflicts and trade offs between economic growth and the current account?

Answer 22

During periods of economic growth, consumers have high levels of spending. In the UK, consumers have a high marginal propensity to import, so there is likely to be more spending on imports. This leads to a worsening of the current account deficit. However, export-led growth, such as that of China and Germany, means a country can run a current account surplus and have high levels of economic growth.

Question 23

What are the potential conflicts and trade offs between economic growth and the government budget deficit?

Answer 23

Reducing a budget deficit requires less expenditure and more tax revenue. This would lead to a fall in AD, however, and as a result there will be less economic growth.

Question 24

What are the potential conflicts and trade offs between economic growth and the environment?

Answer 24

High rates of economic growth are likely to result in high levels of negative externalities, such as pollution and the usage of non-renewable resources. This is because of more manufacturing, which is associated with higher levels of carbon dioxide emissions.

Question 25

What are the potential conflicts and trade offs between unemployment and inflation

Answer 25

In the short run, there is a trade-off between the level of unemployment and the inflation rate. This is illustrated with a Phillips curve.

As economic growth increases, unemployment falls due to more jobs being created. However, this causes wages to increase, which can lead to more consumer spending and an increase in the average price level.

The extent of this trade off can be limited if supply side policies are used to reduce structural unemployment, which will not increase average wages.

Question 26

What responsibility does the UK government have in terms of economics?

Answer 26

To manage the economy as well as the central bank

Question 27

What does economics ensure?

Answer 27

That through the scarcity of resources, people can sustain their lives and achieve their needs and wants

Question 28

What does maintaining economic stability ensure?

Answer 28

Consumer confidence is maintained, more consumption and production which in turn generates more economic activity

Question 29

What are the three main instruments(policies) at government disposal?

Answer 29

Monetary, Fiscal and supply side policies

Question 30

What is a monetary policy?

Answer 30

Changing the supply of money

Question 31

What is a fiscal policy?

Answer 31

Changing the amount the government takes in and gives out (taxes)

Question 32

What is a supply side policy?

Answer 32

Affecting the incentives to produce, individuals act efficiently from economics point of view

Question 33

How does setting objectives help to determine future policy decisions?

Answer 33

Enables response to changes in economic variables to be measured and analysed by economists

Question 34

How do the main macroeconomic policies being achieved benefit the economy?

Answer 34

sustainable economic growth - Improves living standards

minimising unemployment - contributes to greater aspirations e.g. enterprise

price stability( stable inflation rate) - Boosts purchasing power

stable balance of payments on the current account (at equilibrium exports = imports) - helps a country live within its means (borrowing etc)

Equitable distribution of income - reduced poverty and economic hardship

Question 35

migrant remittances

Answer 35

workers that go overseas but send income back e.g. working in the UK and sending money back to India