Government Economic Policy Objectives Flashcards
What are the four main macroeconomic objectives governments try to achieve?
- Strong economic growth
- Keeping inflation low
- Reducing unemployment
- Equilibrium in balance of payments
What is economic growth?
An increase in the productive potential of an economy
What are the different stages of the economic cycle?
Boom- When the economy is growing quickly
Recession- When there is negative economic growth for at least 2 consecutive quarters
Recovery- When the economy begins to grow again
What is the trend rate of growth?
The average rate of economic growth over a period of both economic booms and slumps
What is an output gap?
The difference between the level of actual output and trend output
What are some benefits of economic growth?
- Decrease unemployment
- Higher wages for employees
- Increased Investment
What are some costs of economic growth?
- Income inequality
- Deficit in the balance of payments
- Industrial expansion can lead to negative externalities
What is a demand side shock?
A domestic or global situation that causes aggregate demand to rise or fall
What is a supply side shock?
A domestic or global situation that causes aggregate supply to rise or fall
What is cyclical unemployment?
When the economy is an a recession, demand falls so unemployment rises
What is seasonal unemployment?
When the time of year effects the amount of employment. E.g. Christmas
What is structural unemployment?
When there is a mismatch in skills between individuals looking for work and the work that is being offered
What is frictional unemployment?
The unemployment that comes from workers moving from one job to another job
What is cost push inflation?
Inflation which is caused by the rising costs of inputs of production
What is demand pull inflation?
Inflation which is caused by excessive growth in aggregate demand
What is the natural rate of unemployment?
The rate of unemployment when the labour market is in equilibrium
What does the short run Phillips curve show?
The trade off between unemployment and inflation
What is Fisher’s equation of Exchange?
MV = PT
M = Money Supply
V = Speed at which money is spent
P = Price Level
T = Total transactions in an economy
What are the causes of a current account deficit?
- High levels of consumer spending
- Struggles when competing internationally
- External shocks
What are the causes of a current account surplus?
- When the economy is in a recession, domestic producers are struggling, so international trade is a better option
- Low value of domestic currency, exports are cheap
- High interest rates
What are the consequences of a balance of payments deficit?
- Could mean economy is uncompetitive
- Wealthy people will import more, long term this will cause problems
- Fall in the value of the currency
- Increased unemployment
What are the consequences of a balance of payments surplus?
- Shows an economy is competitive
- Can lead to stagnation over prolonged periods of time
- Overreliance on exports
How might the government try to correct a balance of payments deficit?
- Supply side policies to reduce structural problems
- Restrictions on imports
- Fiscal or monetary policy to reduce spending in the economy
How might the government try to correct a balance of payments surplus?
Try to raise the value of their currency, reducing exports and increasing imports
What do the capital and financial accounts show?
Asset transfers
What is included in the capital account?
Transfers of non-monetary and fixed assets
What is involved in the financial account?
Movement of financial assets, such as:
- FDI
- Portfolio investment - investment in financial assets such as shares
- Financial derivatives - Contracts whose value is based on the value of an asset
- Reserve assets - Financial assets held by the Bank of England
Where is income from the financial account recorded?
Current Account
What is the relationship between the current account and the capital and financial accounts?
The current account should balance to the sum of the capital and financial accounts
What are long term flows?
When things such as FDI is often made when a country gains comparative advantage in producing something, which happens over a long period of time
What are short term flows?
Also called hot money, due to speculation and people trying to quickly make money, such as moving money from one currency to another to try and make a profit through change of exchange rates
What do governments use short term policies for?
To correct sudden problems , such as major unemployment caused by a recession
Where is the natural rate of unemployment?
When the labour market is in equilibrium, when labour demand is equal to labour supply
How can cyclical unemployment be reduced during a recession?
Demand side policies
How can the government reduce the natural rate of unemployment?
Supply side policies that make the labour market more flexible, and reduce frictional and structural unemployment
What is flexibility of labour determined by?
- Labour mobility
- Wage flexibility
- Flexibility of working arrangements
How can labour flexibility be improved?
Scrapping NMW and limiting trade union power
How can the government tackle frictional unemployment?
- Income tax cuts will increase incentive to find work quicker and work longer hours
- Increased information about jobs will help to find jobs quicker
- Reduction of benefits
How can structural unemployment be reduced?
By implementing policies that reduce occupational and geographical immobility
How can the government tackle structural unemployment?
- Investing in training schemes that help to improve skills
- Giving subsidies to workers so that they can afford to move house to an area with more work available
