L5: The role of the govt in stabilising the economy

Question 1

The Government has 3 main goals which they pursue as the achievement of those goals is seen as a precondition to a stable economy.​
What are they?

Answer 1

These goals are:​

The Goal of Low Inflation​

The Goal of Strong and Sustainable Economic Growth​

The Goal of Full Employment

Question 2

What is The Goal of Low Inflation​

Answer 2

The Government aims to have the general level of prices increase at a rate of 2-3% on average, over time. ​

Question 3

If prices increase more than 3% (Inflation)

Answer 3

Consumers save rather than spend.​

Businesses lay off workers due to increased costs of production.​

Production slows

Question 4

If prices increase less than 2% (Inflation)

Answer 4

Consumers delay purchases as there is less pressure to buy now.​

Businesses see slow price rises as there being less potential for increased profits and will not increase production.

Question 5

What is The Goal of Strong and Sustainable Economic Growth

Answer 5

he Government aims to increase the total real value of production by the highest rate possible without causing any unnecessary environmental, external or inflationary pressures.​

Usually measured at a rate of 3-3.5% Real GDP Growth per annum.​

Question 6

Slow growth rates will result in ( Eco Growth )

Answer 6

Lead businesses to slow production and lay off labour.​

Decrease material living standards

Question 7

High growth rates will will result in ( Eco Growth )

Answer 7

Lead to inflation if we are producing at capacity (Due to shortages)​

Lead to environmental damage.

Question 8

What is The Goal of Full Employment

Answer 8

The Government aims to for the lowest rate of unemployment possible without causing inflation to accelerate (usually around 4.5% unemployment rate or NAIRU)​

NAIRU stands for the non-accelerating inflationary rate of unemployment.

Question 9

Low unemployment rates will

Answer 9

Lead to shortages and inflation due to the higher average income.​

Question 10

High unemployment rates will

Answer 10

Lead to decreases in production due to lower demand.​

Put increased pressure on government finances.

Question 11

They 2 types of Budgetary policies

Answer 11

expansionary or contractionary.

Question 12

What is Expansionary Budgetary Policy​

Answer 12

Is used when the economy is underperforming and the government wants to speed up economy activity.​

This is where the governments outlays are greater than their revenues

Expansionary changes to budgetary
policy could include:​

Infrastructure projects​
Decreasing tax rates​
Increasing transfer payments (welfare)

Question 13

What is Contractionary Budgetary Policy

Answer 13

Is used when the economy is overperforming and the government wants to slow down economy activity.​

This is where the governments revenues are greater than their outlays.​

Contractionary changes to budgetary policy could include:​

Increasing tax rates​
Decreasing transfer payments (welfare) or making accessing welfare more difficult.​

Question 14

The 2 different type of efficiency and there definitions.

Answer 14

Allocative efficiency – which is the only combination of production which maximises living standards where all opportunity costs are minimised.​

Technical/productive efficiency – which is where businesses are producing at the lowest cost or inputs for the highest possible overall output.​

Question 15

Ways the Government can increase efficiency.

Answer 15

The Government can attempt to increase efficiency through many policies such as:​

Funding education and training.​

Incentives for research and development.​

Decreasing tax rates.​

Funding infrastructure projects.