Chapter 9 - Macroeconomic Objectives of Governments

Question 1

What are the Six major macroeconomics objectives and why are they only objectives?

Answer 1

DIEGUB
Economic Growth.
Control of Inflation.
A reduction in unemployment (less than 2%).
Sustainability of flows on the balance of payments.
Making the Distribution of income more equal. (Top 10% should increase similarly to bottom 10%)
Protection of the Environment.
Policies enacted by the government to fulfil any of these objectives is likely to impact more than one objective. Opportunity costs are involved.

Question 2

Why is economic growth seen as a macroeconomic objective?

Answer 2

A governments success is often judged on the level of economic growth. With economic growth generally comes an increase in incomes and jobs, yet, economic growth is often out of the governments control.

Question 3

BRIC countries?

Answer 3

Brazil, Russia, India and China. Seen as the drivers of world growth in future years, with their increase in incomes and efficient output.

Question 4

Emerging markets?

Answer 4

Countries that are currently growing and industrialising very quickly.

Question 5

Trend in Growth?

Answer 5

The average rate of growth over a period of time.

Question 6

What Evaluation points can be made about economic growth as a macroeconomic objective?

Answer 6

Growth can be out of governmental control. e.g. 2008 financial crash.
Some economists believe that governments cannot do much to stimulate growth and that letting markets work is the best way to control then economy.
Spare capacity can be partially attributed to the high levels of economic growth in developing economies.
The rate of growth isn’t as important as the method of growth. Growth can be jobless if capital is invested into machinery.
Growth can have negative consequences.

Question 7

Spare capacity?

Answer 7

Unemployed resources in an economy, meaning an economy can grow very quickly. e.g a skilled labour force.

Question 8

How can inflation be seen as damaging to an economy?

Answer 8

Comparative inflation rates effect international competitiveness.
People on fixed incomes or who’s wages don’t rise with inflation experience loss in real terms.
High inflation rates may lead the MPC to rise interest rates (tight monetary policy) which can effect the economy negatively.
Demand-pull inflation means spending is rising above sustainable levels. This can be caused by interest rates falling etc.
Cost-push inflation will increase inflation.

Question 9

Tight monetary Policy?

Answer 9

When interest rates are kept high because of inflationary fears.

Question 10

Cost-push inflation?

Answer 10

Inflation is caused by decreases in AS. When production costs are rising or firms are willing and able to produce less at any price level. Monetary Policy will not work as this is a supply side policy..

Question 11

Demand-pull inflation?

Answer 11

Inflation caused by increased AD, meaning spending is rising above sustainable levels.

Question 12

What Evaluation points can be made about inflation as a macroeconomic objective?

Answer 12

Relative importance to other objectives may be low.
Inflation can be adjusted by index linking.
Inflation can be caused by cost increases, so the MPC won’t be able to have much impact as they deal with demand- side polices such as interest rates and quantitative easing.
Raising interest rates to control inflation can have damaging effects on the economy. This is why interest rate changes are often seen as a blunt instrument. Other policies may be better than a change in interest rates.
If inflation relative to other countries is similar, international competitiveness will remain the same.
Too much focus on inflation resulting in a neglect of other objectives can be devastating for an economy.
Small levels of inflation can be good as it acts as a cushion to falling prices.

Question 13

Index Linking?

Answer 13

When changes in pensions and wages are linked to inflation.

Question 14

CPI?

Answer 14

Main measure of inflation in the UK.

Question 15

What is the term ‘Blunt Instrument’ used for?

Answer 15

To describe policies that are unable to focus clearly on one economic problem, instead damaging large areas which might otherwise have flourished.

Question 16

Why is reducing unemployment often perceived as tricky to achieve?

Answer 16

There are several types of unemployment meaning it is hard to impact all of them. Policies will be successful at each different type.

Question 17

How is cyclical unemployment caused and what can the government do to reduce it?

Answer 17

AKA Demand deficiency unemployment. Occurs when there is a lack of spending within an economy. The government may attempt to increase AD, but there will be multiplier effects.

Question 18

How can policy implemented to reduced cyclical unemployment be evaluated?

Answer 18

Some economist argue that the multiplier effect id very small. Ergo, the impact of G will be small, simply leading to future debt.
Time lags.
Classical economists argue that the reason this problem exists is because workers will not accept lower wages.

Question 19

Demand Deficiency?

Answer 19

A lack of AD in an economy to reach full employment/ capacity.

Question 20

Classical Economists?

Answer 20

Opposite of Keynesian economists. Believe there is little unemployment if free markets are left to work for themselves.

Question 21

How is structural unemployment caused and what can the government do to reduce it?

Answer 21

Not much can be done. It may be better to offer re-training workers or subsidising firms willing to take on workers to be re-trained in the job.

Question 22

How can policy implemented to reduced structural unemployment be evaluated?

Answer 22

Opportunity cost involved in subsiding firms.
May cost more to retrain workers than to give them benefits.
Overtime the structural problems may remove themselves. Not many people train to be a miner today.
If no subsidies are given, companies may retrain workers themselves.

Question 23

How is frictional unemployment caused and what can the government do to reduce it?

Answer 23

When people are between jobs. Can be improved by increasing information flows and extending services offered by job centres.

Question 24

How can frictional unemployment be evaluated?

Answer 24

If it isn’t a significant problem, money could be better spent elsewhere.
Many people can find jobs independently and only a small section of the workforce use job centres.

Question 25

How is classical unemployment caused and what can the government do to reduce it?

Answer 25

When there are problems with the supply side of labour, such as the minimum wage being to high or high benefits. A laissez-fair approach may be appropriate.

Question 26

How can classical unemployment be evaluated?

Answer 26

Keynes and other economists argue that whilst in the classical view there is low employment, this is because ‘in the long run we are dead’. We cant simply wait around for market forces to have an effect.
The economic cycle suggests much unemployment is cyclical not classical.

Question 27

Explain The BOP as a macroeconomic objective and why it is bad to have a deficit on the capital account?

Answer 27

The objective is to remove persistent deficits. If money is always flowing out of a country, it will become poorer over time, increasing unemployment and the the burden on future generations.

Question 28

Evaluate the BOP as a macroeconomic objective.

Answer 28

Surpluses can be just as bad as deficits as to much money flowing in to a country causes inflation.
A floating exchange rate can solve this problem. If there is a BOP deficit, we would expect to seethe value of the currency to fall, making exports cheaper and imports more expensive, in theory removing the deficit.
A deficit on the BOP may indicate rapid growth as high incomes mean consumers can enjoy more goods and services from abroad.
A deficit could also be a sign of growing output potential. If a lot of raw materials are bought they may be able to export more in the future.
Movements in goods and services are a tiny proportion of payments between countries, and capital flows for speculative or other investment purposed outweigh any problems in the ‘real’ economy.

Question 29

How might the government complete the macroeconomic objective of income redistribution?

Answer 29

Increasing taxes on high earners or profitable business.
Increasing benefits for low income groups.
Raising the minimum wage.
Spending more money on schools and healthcare provided by the state, reducing the difference in education between wealthy and less well off.

Question 30

How can the macroeconomic objective of income redistribution be evaluated?

Answer 30

High taxes on high income earners is a disincentive to work hard, employ more people and even pay tax in a certain country.
Benefits may decrease incentive to work.
Market interference in the form of an increasing minimum wage may result in an increase in unemployment and can have negative knock on effects.
An increased minimum wage will have less effect in places that have high wages, such as London.
Increased expenditure in education may not have a linear relationship with an increase in education. Money may be spent inefficiently.

Question 31

How might the government complete the macroeconomic objective of helping the environment?

Answer 31

Legislation - Groups of countries (EU) can make a concerted effort. Signing up to international treaties (Rio+20, Kyoto Protocol) can also be useful to achieve targets.
Education - Making people more aware.
Incentives - Tax breaks, subsidies etc.
Involvement in markte schemes such as the EU carbon emissions trading scheme.

Question 32

How can the macroeconomic objective of protecting the environment be evaluated?

Answer 32

Some people do not believe that humans are causing climate change.
Green technologies are often more expensive and less efficient.
Visual pollution and other negatives.
Bioethanol forces up food prices as it requires land, often in places where food is scarce or incomes are low. Effects lower income groups more.
Green Taxes increase the cost of living for many people. Cost-Push inflation if motoring costs increased

Question 33

A floating exchange rate?

Answer 33

A mechanism that allows a currency to rise and fall in response to supply and demand. Not manipulated by governments purchasing and selling currencies in the market.

Question 34

A deficit or surplus?

Answer 34

… on the current account of the balance of payments. Involves changes in the patient of goods, services, investment income and current transfers.

Question 35

How might the government attempting to reduce inflation have an effect on employment?

Answer 35

The government is likely to try and dampen AD. Less AD may mean less spending within an economy, in turn leading to lay offs as growth is slowing and there is less profit, etc…
Trade-off can be shown with Phillips Curve.

Question 36

How might the government attempting to reduce unemployment have an effect on inflation?

Answer 36

To increase employment the government may increase spending or enact policies to increase AD. This will increase incomes and henceforth expenditure. Increased spending is likely to increase prices through demand pull inflation.
Trade-off can be shown with Phillips Curve.

Question 37

How might the government attempting to increase AD have an effect on sustainability? ?

Answer 37

When an economy grows, standards of living tend to increase. In order to be sustainable, this must not come at the cost to future generations. There is a costs between enjoying the resources today and someone else enjoying them in the future. Increased use of fossil fuels increases global warming. All six macroeconomic-objectives must be weighed up in the same pragmatic way.

Question 38

Define sustainable growth?

Answer 38

Growth that doesn’t compromise the welfare of future generations.

Question 39

How can the governments methods of inflation targeting and BOP control conflict?

Answer 39

Controlling inflation should make a country more competitive internationally and therefore lead to an improvement on the balance of payments.
Exports become relatively cheaper, imports more expensive. Therefore controlling inflation shouldn’t conflict with dealing with a BOP deficit. Yet, measures used to control inflation will have an effect on the BOP. Expansionary monetary policy (lower interest rates) would increase the exchange rate as money flows into the economy from investors, raising exports prices and reducing imports prices.
Contractionary fiscal policy would attain opposite results.

Question 40

Expansionary monetary policy?

Answer 40

an attempt to use monetary policy to boost or reflate aggregate demand, output and jobs. Typically this involves a central bank cutting official policy interest rates.