chapter 25 - macroeconomic aims of gov

Question 1

what are the macroeconomic aims of gov?

Answer 1

economic growth
balance of payments 
stable prices
low unemployment/ full employment 
redistribution of income

Question 2

definition of:

economic growth

Answer 2

annual increase in the level of national output (GDP)

Question 3

definition of:

gross domestic product

Answer 3

amount of goods and services produced in the economy over a period of time

Question 4

explain economic growth

Answer 4

increase output - economic growth positive - increase in quantity and quality of f.o.p shifts ppc outward

Question 5

what happens if gdp decreases?

Answer 5

• unemployment increases - decrease in living standard
• fall in profit and revenue for firms - low investments
• lower tax revenue

Question 6

definition of:

unemployment

Answer 6

people who are willing and able to work and actively seeking for employment but unable to find jobs

Question 7

how does high employment benefit?

Answer 7

high employment - higher disposable come - higher consumption - higher output (GDP) - increase in living standards

Question 8

what happens if low employment?

Answer 8

• decrease in national output
• gov gives welfare payment (unemployment benefits) - increase public expenditure while income taxes decrease - causes budget deficit

Question 9

definition of:

inflation

Answer 9

increase in the average level of price of goods and services

Question 10

how is inflation measured?

Answer 10

using consumer price index

Question 11

what happens in price increase too quickly?

Answer 11

• firm cost of production increase - labours demand for higher wages
• reduce purchasing power
• export becomes expensive
• cause hardship for poor

Question 12

definition of:

balance of payment

Answer 12

financial record of the country’s transaction with the rest of the world for a given time period

Question 13

what is it called when export > import

Answer 13

surplus

Question 14

what is it called when import > export

Answer 14

deficit

Question 15

what happens if there’s a deficit?

Answer 15

• economy will run out of foreign currency and import will reduce
• value of our currency will fall against other foreign currency which makes import more expensive to buy

Question 16

what happens if surplus?

Answer 16

our value of currency increases against other foreign currency which makes exports more expensive

Question 17

definition of:

redistribution of income

Answer 17

aims to achieve equality in the distribution of income

Question 18

how does gov redistribute income?

Answer 18

• gov impose higher tax on the rich and use the tax to fund welfare schemes for the poor
• gov provide subsidies

Question 19

what are the conflicts between macroeconomic aims of gov?

Answer 19

• full employment vs stable price
• full employment vs balance of payment
• economic growth vs stable price
• economic growth vs balance of payment

Question 20

explain the conflict between full employment vs stable price

Answer 20

full employment - have more disposable income - increase spending ability - demand increase and consumption increase - cause inflationary pressure

Question 21

definition of:

demand-pull inflation

Answer 21

when demand increase faster than supply

Question 22

definition of:

cost-pull inflation

Answer 22

full employment makes it harder for firms to attract skilled labours so need to offer high wages - cost of production increases - selling price increase

Question 23

explain the conflict between full employment vs balance of payment

Answer 23

• more disposable income - higher consumption - spending on imports increase
• full employment causes inflation - high inflation means export becomes less competitive

Question 24

explain the conflict between economic growth vs stable price

Answer 24

reduction in interest rates stimulate economic growth - people with existing loans have more disposable income - firms increase investment as borrowing is cheaper - higher consumption leads to demand-pull inflation

Question 25

explain the conflict between economic growth vs balance of payment

Answer 25

• higher consumption expenditure causes deficit in country’s balance of payment - higher consumption on imports
• higher consumption means inflation - inflation makes exports less competitive