Government Economic Policy

Question 1

Additional objectives of macro policy

Answer 1

Reducing debt
Environmental sustainability
Access to public services

Question 2

What does the Philips curve show

Answer 2

When the unemployment rate is low then wage pressures in the market are likely to be low.

Question 3

What happens on the Philips curve as the rate of unemployment falls

Answer 3

Labour shortages may cause and increase in wage inflation and higher unit labour costs

Question 4

What do neo-classical economists believe

Answer 4

That in the LR, output always returns to a long run equilibrium path
&
An economy will revert to a level of output where unemployment returns to the natural rate of unemployment

Question 5

How is the long run Philips curve drawn

Answer 5

Vertical - it is independent of the level of SR demand/output and the general price level

Question 6

What do successful supply-side policies that (among other aspects) help to do

Answer 6

• improve occupational mobility
• attract more people into work
• lift labour productivity

Question 7

What do successful supply-side policies do

Answer 7

Lead to a fall in the natural rate of unemployment (frictional and structural) and this can lead to the LR Philips Curve to shift to the left

Question 8

Why is the rate of inflation within the UK so low despite falling unemployment

Answer 8

• falling global commodity prices
• slow wage growth
• slowed real economic growth

Question 9

Possible Conflicts Between Growth And Inflation

Answer 9

• accelerating inflation is greatest when SRAS is inelastic (low spare capacity)
• high inflation and a slow down in economic growth

Question 10

What is the output gap

Answer 10

The difference between the actual level of GDP and it’s estimated level

Question 11

What is a negative output gap

Answer 11

The level of actual GDP is less than potential GDP.
Some factor resources are under-utilised.
Higher unemployment and risk of deflation

Question 12

What is a positive output gap

Answer 12

Actual GDP is greater than the estimated potential GDP.
Some resources work beyond capacity.
Demand pull and cost push inflation.

Question 13

Conflict between economic growth and the balance of payments

Answer 13

When real incomes rise at a rapid rate, consumers will tend to buy more imports - leading to a worsening of the trade balance.
Fast growing counties also have high inflation which worsens their competitiveness.

Question 14

Policies to reconcile growth / trade balance trade off

Answer 14

Supply side policies
XR depreciation
Sound / effective macro economic policies

Question 15

Examples of external shocks

Answer 15

• World demand shocks
• World supply / price shocks
• World financial shocks

Question 16

What are world demand shocks

Answer 16

These are associated with a rise or a decline in spending and confidence abroad

Question 17

What are world supply / price shocks

Answer 17

These affect the global supply and prices of goods and services

Question 18

What are world financial shocks

Answer 18

These occur in the global financial system, such as increased stress in the international banking system or financial markets

Question 19

Evaluation point on external shocks

Answer 19

Not all of them are negative E.g. Some resulting from advances in production technologies

Question 20

Key external influences on the UK economy

Answer 20

• fluctuations in global equity and bond markets

- longer term shifts in competitiveness / trade

Question 21

Effect on inflation and interest rates

Answer 21

Low inflation = imports cheaper, lower prices in the supply chain, no pressure in bank to start rising interest rates

Question 22

Effect of falling global commodity prices on economic growth

Answer 22

Stronger in the short term - real incomes are higher for consumers and business profits rise as supply costs fall

Question 23

Effect of falling global commodity prices on unemployment

Answer 23

Help bring unemployment down but some industries might be negatively affected e.g. renewables

Question 24

Effect of falling global commodity prices on balance of trade

Answer 24

Improved - the U.K. is a net importer of many commodities

Question 25

Effect of falling global commodity prices on business investment

Answer 25

Higher profits for businesses who import commodities

Question 26

Wider effect of falling global commodities

Answer 26

Many lower commodity prices have reduced world economic growth and sub Saharan African countries hit hard by falling prices

Question 27

Key macro policies to help absorb external shocks

Answer 27

• floating XRs
• geographically and occupationally mobile labour force
• a diversified economy