6.1 – Government Economic Policies and Objectives Flashcards
What are the five main Economic Objectives?
Maintain low inflation - inflation is the increase in average prices of goods and services over time.
Low unemployment - unemployment exists when people who are willing and able to work cannot find a job.
Economic growth - economic growth occurs when a country’s Gross Domestic Product (GDP) increase
Balance of Payments - this records the difference between a country’s exports (goods and services sold from the country to another) and imports
Income equality - the difference/gap between the incomes of rich and poor people should narrow down for income equality to improve.
What are the effects of High Inflation?
As cost of living will have risen and peoples’ real incomes will have fallen.
Prices of domestic goods will rise as opposed to foreign goods in the market.
Domestic workers may lose their jobs if their products and firms don’t do well.
When prices rise, demand will fall and all costs will rise.
The living standards (quality of life) in the country may fall when costs of living rise.
What are the Effects of high unemployment?
Unemployed people do not produce anything and so, the total output/GDP in the country will fall.
Unemployed people receive no incomes, thus income inequality can rise in the economy and living standards will fall.
The government pays out unemployment benefits to the unemployed and this will rise during high unemployment and government will not enough money left over.
What are the Effects of reducing GDP (recession)?
As output falls, fewer workers will be needed by firms, so unemployment will rise
As goods and services that can be consumed by the people falls, the standard of living in the economy will also fall
What are the Effect of a disequilibrium in the balance of payments?
If the imports of a country exceed its exports, it will cause depreciation in the exchange rate.
If the exports exceed the imports it indicates that the country doesn’t benefit from any high output consumption.
What are the Effects of poor income equality?
Inequal distribution of goods and services- the poor cannot buy as many goods as the rich- poor living standards will arise.
What are the Four Parts of The Economic Cycle?
Growth– when GDP is rising, unemployment is falling and there are higher living standards in the country. Businesses will look to expand and produce more and will earn high profits.
Boom– when GDP is at its highest and there is too much spending, causing inflation to rapidly rise. Business costs will rise and firms will become worried about how they are going to stay profitable in the near future.
Recession– when GDP starts to fall due of high prices, as demand and spending falls. Firms will cut back production to stay profitable and unemployment may rise as a result.
Slump– when GDP is so low that prices start to fall (deflation) and unemployment will reach very high levels. Many businesses will close down as they cannot survive the very low demand level. The economy will suffer.
What is Fiscal Policy?
Using taxes and government spending to influence the demand conditions in the economy.
What is Government Spending in Fiscal Policy?
Governments can change their spending pattern to influence demand. Higher spending on these services can boost demand in the economy as jobs and GDP increase. Reducing government spending will reduce demand.
What are Direct Taxes?
Paid directly from incomes. There are different types of direct taxes:
Income tax: paid from an individual’s income. When income tax rise, firms will face lower demand and sales and will cut production, increasing unemployment. Lower income taxes will encourage more spending and thus higher production.
Corporation Tax: tax paid on a company’s profits. When the corporation tax rate is increased, businesses will find it hard to expand and produce more. It will also discourage people from investing in businesses and economic growth could slow down. Reducing corporation tax will encourage more production and investment.
What are Indirect Taxes?
Added to the prices of goods and services and it is paid while purchasing the good or service. Some examples are:
GST/VAT: these are included in the price of goods and services. Increasing these indirect taxes will increase the prices of goods and services and reduce demand and in turn profits. Reducing these taxes will increase demand.
Import tariffs and quotas: an import tariff is a tax on imported goods and services; an import quota is the physical limit to the quantity of a product that can be imported into a country. Increasing tariffs will reduce demand for foreign products and imposing quotas will mean there are lesser foreign goods in the market to be sold and so demand is reduced.
What is Monetary Policy?
Using interest rates (as well as money supply and the exchange rate) to influence the demand conditions in the economy.
What is the Interest Rate?
The cost of borrowing money. A lower interest rate will be more favourable to a business.
How does Interest Rate Affect the Economy?
A higher interest rate will thus discourage borrowing and encourage saving – thus, investing and spending will fall respectively - demand in the economy will fall. A lower interest rate will increase demand.
From a business’ point of view, a higher interest rate means more interest has to be paid on existing loans, reducing profits; as well as suffer low demand levels. They may have to delay expansion plans that involve borrowing from the bank.
What are Supply-Side Policies?
Policies that influence supply. It can include:
Privatisation: selling government organizations to private individuals
Improve training and education: governments can spend more on schools, colleges and training centres so that people in the economy can become better skilled and knowledgeable.
Increased competition: by acting against monopolies and reducing government rules and regulations, the competitive environment can be improved and thus become more productive.
