Ls11

Question 1

What are the four variables which the macroeconomic objectives relate to?

Answer 1

– Economic growth
– Inflation
– Unemployment
– The current account on the balance of payments

But also consider:
- The environment
– Income distribution
– The government budget

Question 2

Describe economic growth as a macroeconomic objective

Answer 2

• governments usually attempt to maximise the growth rate of their economies
• For low and middle income countries, it is possible for annual growth rate to reach 10% or higher.
• For high income countries, an annual growth rate of 2.5% may be possible
• High rates of growth in low/middle income countries can be achieved by moving workers from low productivity agriculture into higher productivity manufacturing. Using modern technology can also increase labour productivity
• High income countries have already been through an industrialisation process and use highly developed technology. The population in high income countries is usually facing rapid aging, which means the number of workers in the economy would fall. This makes it difficult to increase growth.

Question 3

Describe unemployment/employment as a macroeconomic objective

Answer 3

• The government would like to see unemployment as low as possible without the risk of inflationary pressures
• It is impossible to have a 0% unemployment, because of frictional, as well as seasonal unemployment
• Another reason government are keen to expand employment is because it increases tax revenues and reduces the welfare benefits being paid out to the unemployed

Question 4

Describe inflation/deflation as a macroeconomic objective

Answer 4

• Central banks and governments tend to set inflation target at around 2-3%
• This is a low, but positive inflation because high levels of inflation are seen as unsustainable
• low levels of our undesirable because it is edging on deflation, which can be linked to recession and negative economic growth

Question 5

Describe the balance of payments on current account as a macroeconomic objective
What does surplus/deficit mean?

Answer 5

• governments aim for the current account to be broadly in balance over time
  -Strong economy is usually have a persistent surplus
• Weaker economies have a persistent deficit
• However, of course, there are exceptions and countries can run persistent surpluses and have no economic growth rates. countries can run persistent deficits, but grow very fast over time without consequences.
• very large, current account deficits as a percentage of GDP can be very dangerous because if borrowers reach a point where they can no longer repay their loans, there will be an economic crisis and a sudden, large fall in GDP

Question 6

Describe government budgets as a macroeconomic objective

Answer 6

• since the financial crisis of 2008, the importance of fiscal budget deficit has grown
• If a country is growing at 2.5% per year, with 2% inflation and low interest then a fiscal deficit of 3% per year will maintain a stable level of national debt.
  – Large fiscal deficits are unsustainable in the long term, because this means the government has to borrow far more money than it expects to pay back with interest in the future . In the short-term large fiscal deficits are sustainable, as long as the fiscal deficit is reduced to manageable levels over time.
• Some economists argue that fiscal deficits should be cut as quickly as possible, even if it causes negative economic growth and increase in unemployment
• Some economists argue that cutting fiscal deficit at a slower pace, helps the economy to grow faster, and this leads to quicker rebounds in tax revenues and a fall in welfare payments.

Question 7

Describe the environment as a macroeconomic objective

Answer 7

• because there is no simple measure of the impact of economic activity on the environment, governments have a wide variety of objectives in relation to it
  – Environmentalists tend to be anti-growth arguing that increased economic activity will damage the planet
• Pro – growth economists tend to argue that increases in output and improvements in technology can allow economies to clean up their environments and reduce pollution

Question 8

Describe income distribution as a macroeconomic objective

Answer 8

• right wing economists and politicians argue that inequality is positive because it increases incentives to work and to take economic risks. This would increase economic growth rates. Therefore they are against policies which would reduce inequalities such as increasing taxes on higher earners.
• Left-wing economists and politicians argued that on the principle of fairness, everyone should access a certain standard of living and governments need to intervene to reduce inequalities. The government should provide goods such as health care and education for free. The government should also transfer income directly through taxes and benefits. Left-wing economists argue that high levels of inequality are not correlated to economic growth and that individuals will work and take risks even if tax rates are high.