government macroeconomic policy objectives chapter 21

Question 1

inflation target

Answer 1

the inflation rate a central bank is set to achieve

Question 2

reasons why a government would not aim zero inflation rate

Answer 2

any measures of inflation tend to overstate any rise in prices
to aim for zero inflation may result in deflation
a low and stable rise in prices caused by higher spending is likely to encourage firms to increase their output

Question 3

what inflation rates do central banks plan to achieve

Answer 3

some governments set a target a target range. others set a central target with a margin either side, for example 2% with a margin of 1 percentage point above and 1 percentage point below

Question 4

why are are inflation targets made

Answer 4

An inflation target makes a central bank more accountable. It may also reduce inflationary expectations. If firms, workers and households have confidence in a central bank’s ability to meet its target, they may act in a way that does not push up prices.

Question 5

advantages of having a low proportion of the labour force unemployed

Answer 5

high output, high tax revenue and low expenditure on unemployment benefit.

Question 6

why do governments try to keep unemployment that is experienced low

Answer 6

so that workers do not lose their skills and work habits. Governments seek to achieve this by promoting labour mobility through, for instance, training schemes.

Question 7

why should governments be concerned with the quality of unemployment

Answer 7

This is because the effect of low unemployment on the economy and the workers themselves may not be very beneficial if the jobs are unskilled, insecure and low-paid.

Question 8

what do governments not want in terms of their economic growth

Answer 8

Governments do not want their economies to grow too slowly and they certainly do not want to experience negative economic growth. If a country’s output is falling, unemployment may increase and, with fewer goods and services, living standards may decline.

Question 9

why do governments want to avoid high rate of economic growth

Answer 9

because an economy could overheat, with aggregate demand increasing faster than aggregate supply. Pressure could be put on resources and inflationary pressure may build up. Entrepreneurs may become over-optimistic and may set up firms that do not have a long-term future. Households may expect their incomes to continue to increase at a high rate. This may encourage them to take out loans that they will struggle to repay if their expectations are wrong.

Question 10

how does the government determine a good growth rate

Answer 10

In determining what would be a good growth rate for its economy, a government will take into account a number of factors. These include changes in the size of the labour force, changes in productivity and advances in technology