Government Policy Objectives

Question 1

why do governments want to distribute income equally

Answer 1

reduce poverty and increase welfare to create a better standard of living

Question 2

how does the government redistribute income

Answer 2

tax and welfare payments

Question 3

what are the benefits of higher income individuals

Answer 3

• higher wages acts as an inventive for work so increase productivity
• higher incomes can use their capital to create jobs for others - trickle down effect
• high income spending on luxury goods creates jobs for others

Question 4

how does the government limit environmental damage

Answer 4

• bans or limits on polluting activities (clean air zone)
• influencing cost of polluting for firms (tradable pollution permits)

Question 5

how does the government encourage renewable resources

Answer 5

giving financial incentives to firms or subsidising the development of renewable energy resources

Question 6

what are the negatives with economic instability

Answer 6

• Discourage firms from long term planning
• Discourages FDI

Question 7

how do governments try to ensure economic instability

Answer 7

• reduce large and frequent fluctuations in the trade cycle
• avoid volatility in the inflation and exchange rate
• ensure political stability without corruption or war

Question 8

what are supply side policies better for

Answer 8

long run objectives

Question 9

what are demand side policies better for

Answer 9

short run correction to sudden changes in objectives

Question 10

when do no government objectives conflict

Answer 10

When LRAS increases
–> Keynes argues this doesn’t happen if there is a lot of spare capacity in the economy

Question 11

how can reducing unemployment result in cost-push inflation

Answer 11

when unemployment is low there is few spare worker so demand is high, this increases the wage rate which increases the cost of production which is passed on to consumers in price rises

Question 12

how can reducing unemployment result in demand pull inflation

Answer 12

reduced unemployment causes people to spend more as they are more confident in their job security, this causes AD to increase and prices to increase

Question 13

how does increasing growth conflict with the environment

Answer 13

new factories create more pollution and may destroy habitats, as well as using up more non renewable resources

Question 14

how does increasing growth cause inflation

Answer 14

increased demand means firms will have to increase prices

Question 15

How does low inflation help improve the BoP

Answer 15

if prices are rising slower than other countries then exports will increase and imports decrease

Question 16

How does low inflation conflict with the BoP

Answer 16

high interest rates create low inflation, but these increase demand for the currency appreciating the currency, causes exports to become more expensive so they fall worsening the BoP

Question 17

how does economic growth increase the inequality gap

Answer 17

high skilled workers are more in demand than low skilled, higher incomes increase more than lower incomes

Question 18

how can efforts to decrease inequality restrict economic growth

Answer 18

Governments will increase taxes and increase welfare payments which encourages people not to work or not to work at all
–> some welfare benefits like childcare help people to work

Question 19

what is the NRU

Answer 19

Natural rate of unemployment that occurs when the labour market is in equilibrium

Question 20

what does Phillips curve show

Answer 20

inverse relationship between unemployment and inflation

Question 21

When did Phillips curve break down

Answer 21

in the 1970s when there was stagflation as there was low growth so high unemployment along with high inflation

Question 22

what is the problem with short run Phillips curve

Answer 22

doesn’t take into account the expected rate of inflation that causes peoples actions to change in the long term and can lead to embedded inflation

Question 23

how does the long run Phillips curve result in embedded inflation

Answer 23

reductions in unemployment cause inflation to rise, at the risen level people will expect it to stay there so wage negotiations will be based on the risen level. higher wages create less demand for workers so unemployment will rise back to original level but with new inflation.

Question 24

what do monetarists argue about Phillips curve

Answer 24

In the long run there is no inverse between inflation and unemployment and LRPC will be vertical line