Macro - What are the economic objectives of a government

Question 1

What are the 4 main objectives of government policies(8)

Answer 1

High economic growth
-needs to be sustainable - achieved using renewable resources and in a way that is environmentally friendly

Maintaining high employment
-does not need to be full as there will always be some frictional unemployment

Ensuring price stability/low inflation
-inflation rate of around 2% per year

Balancing imports and export
-must ensure that there is not more money leaking out of the economy (to pay fro imports) than is coming into the country from the sale of exports

Question 2

What is economic growth

Answer 2

A rise in the productive capacity of the economy, resulting in a growth in output over time(growth in real GDP over time)

Question 3

What is GDP(2)

Answer 3

Gross Domestic Product

Measures the valueof all goods and services produced in an economy over a period of time

Question 4

What is the difference between GDP and GDP per capita(2)

Answer 4

GDP divided between the population gives GDP PER CAPITA

GDP per capita takes into account differences in population between countries

Question 5

How can economic growth be measured(2)

Answer 5

By looking at GDP

Rate = change in GDP/original GDP x100

Question 6

What can cause economic growth(2)

Answer 6

Could be demand led or supply led

• demand led growth - when Aggregate Demand (total demand in the economy) rises; this may occur because: incomes rise; taxes are cut; interest rates are cut; there are high levels of consumer and business confidence; expectations are good
• supply led growth - when there is a rise in Aggregate Supply (total supply in the economy. This occurs because there has been an increase in the QUANTITY and QUALITY of resources. e.g. more investment increases the capital stock; better education and training improves the quality and productivity of labour; discovery of new natural resources

Question 7

What are some benefits of economic growth(6)

Answer 7

Higher GDP implies the country is richer and living standards are higher

If the economy is producing more it is likely that more people are employed
-This reduces the costs of unemployment and reduces absolute poverty

If GDP is rising, the government will automatically be earning more tax revenue from existing tax rates.
-This may finance expenditure on more public and merit goods

Supply led growth increases productive capacity so may help bring down inflation

Question 8

What are some costs of economic growth(4)

Answer 8

Environmental costs(pollution, global warming)

Loss of non-renewable resources

In reality GDP may be unevenly spread between the population with the rich getting richer and no benefit to the poor
-wider gap between rich and poor

Inflation

Question 9

What does economic growth being beneficial or not depend on(4)

Answer 9

HOW the GDP rise is achieved ie:

• Demand led or supply led (demand led tends to be unsustainable and can cause inflation)
• From renewable resources or non renewable resources

HOW the rise in GDP is distributed amongst the population

In developing countries the benefits mostly outweighs the cost

Question 10

How can a government use fiscal policies to achieve economic growth(2+2)

Answer 10

To achieve demand-led growth:

• Reduce direct and indirect taxes to stimulate AD
• Increase government spending on benefits and investment to stimulate demand

To achieve supply-led growth:

• Reduce direct taxes to improve economic incentives to work and to invest
• Increase government expenditure on education and training

Question 11

What are fiscal policies

Answer 11

Changes in Government Expenditure and Taxation in order to achieve government objectives

Question 12

How can a government use supply side policies to achieve economic growth(2)

Answer 12

To achieve supply-led growth:

• Increased/Improved education and training
• Encouraging enterprise
• Reducing taxes and benefits to improve incentive to work

Question 13

How can a government use monetary policies to achieve economic growth(2+2)

Answer 13

To achieve demand-led growth:

• Reduce interest rates - reduces saving; encourages borrowing; makes mortgages cheaper so increases peoples disposable income; reduces exchange rates so makes demand for exports rise
• Money Supply is increased(through quantitative easing) making it easier for banks to lend to consumers and businesses to stimulate consumer demand and investment

To achieve supply-led growth:

• Reduce interest rates to stimulate investment by firms (ie borrowing to buy new, more productive capital)
• Increase money supply - encourage the banking sector to lend more money to new and existing businesses to stimulate enterprise

Question 14

What is employment

Answer 14

The number of people who are willing and able to work, and actively seeking work, and are able to find jobs

(check)

Question 15

What is unemployment

Answer 15

The number of people who are willing and able to work, and actively seeking work, but unable to find jobs

Question 16

How is unemployment measured and evaluate these methods(4+3)

Answer 16

The Claimant Count:

• measuring unemployment by the number of people receiving benefits
• underestimates unemployment because some people are too proud to claim benefits or may be ineligible for some reason.
• overestimates unemployment because some people work but still claim benefits (benefit fraud)

The Labour Force Survey:

• same measure as used across Europe and other areas of the world so it makes international comparisons easier.
• looks at who is claiming benefits but also looks at records of whether individuals are actively seeking work (ie job applications)

Question 17

Identify the 7 different types of unemployment and the causes of each(3+3+3+3+2+2+2)

Answer 17

Cyclical Unemployment
-Unemployment caused by a general lack of demand
across the whole economy (ie recession)
-Labour is a derived demand, so if there is no demand for goods there is no demand for labour to make the goods

Structural Unemployment

• caused by a lack of demand for a particular industry’s goods
• usually long term and more serious - workers may be left occupationally or geographically immobile

Regional Unemployment

• Unemployment that is particularly high in a given region
• This has been linked to structural unemployment because when a particular industry is concentrated in one region, the demise of the industry will hit that region particularly hard

Frictional Unemployment

• When people are in between jobs
• There are time lags between workers leaving their job and starting a new one(perhaps due to retraining or relocating)

Seasonal unemployment
-some workers are not employed at certain times of the year(mainly in the tourist industry)

Voluntary Unemployment
-Unemployment caused when workers are unwilling to work at existing rates of pay(due to benefits being to high or the after-tax income being too low)

Technological Unemployment
-Unemployment caused when new capital takes over jobs that were previously done by workers

Question 18

What are the costs of unemployment(9)

Answer 18

Reduced disposable income for the unemployed workers

Poverty/Lower living standards

May be less consumer demand for firms’ products when unemployment is high (especially if they make income elastic normal goods)

Budget deficit

• Tax revenue falls from both direct taxes (income tax) and indirect taxes (VAT)
• Government expenditure on benefits (social protection) will rise

Increased crime rates

The economy will be producing less GDP than it is capable of(slower economic growth)

Labour resources are wasted

Question 19

What are the benefits of unemployment

Answer 19

Frictional unemployment is necessary for a healthy economy which adapts to changes over time

Question 20

How can a government use fiscal policies to reduce unemployment(2+3)

Answer 20

Increase spending
-To stimulate demand via the MULIPLIER effect

Lowering taxation

• Lower levels of direct tax would increase the incentive to work and give people higher disposable incomes, thus increasing spending(since labour is a derived demand, increased demand for products leads to increased demand for labour)
• Lower levels of indirect tax would stimulate demand by making prices cheaper(since labour is a derived demand, increased demand for products leads to increased demand for labour)

Question 21

How can a government use monetary policies to reduce unemployment(5+2)

Answer 21

Decrease interest rates

• Would reduce saving and encourage people to spend, demand for goods increases demand for workers
• Would encourage people to borrow to finance spending, increasing demand
• Would make mortgage repayments cheaper, giving people more money to spend
• Would make it cheaper for firms to borrow to finance investment and expansion

increase money supply
-More money is available from the banking sector to finance consumption and investment

Question 22

How can a government use supply side policies to reduce unemployment(3)

Answer 22

Remove the minimum wage so they can afford to hire more workers

Cut benefits to increase incentives to find jobs

Lower direct taxes on businesses so they can hire more workers

Question 23

What is inflation

Answer 23

A sustained rise in the general level of prices over a period of time

Question 24

What is the rate of inflation

Answer 24

The rate at which the general price level rises over time

Question 25

What is price stability

Answer 25

Means that the general level of prices is kept constant or grows at an acceptably low rate over time

Question 26

How can the rate of inflation be measured(3)

Answer 26

Using the Consumer Price Index (CPI)

• finds out the spending pattern of average families and record the prices of what they buy each month - done at hundreds of different retail outlets
• goods and services are weighted - those that take a higher proportion of spending of families are more important in measuring the rate

Question 27

What causes demand pull inflation(2)

Answer 27

When aggregate demand increases in the economy so that there is excess demand

AG could increase due to tax cuts, low interest rates, income rises etc. (government objectives to solve other problems could cause inflation e.g. increasing AG to reduce unemployment)

Question 28

What causes cost push inflation(2)

Answer 28

When firm’s costs of production rise, so firms put their prices up to compensate for the rising costs of production

Cost may increase due to rise in wage levels(minimum wage); government taxes increase; oil prices increase etc. (government objectives to solve other problems could cause inflation)

Question 29

What are some costs of inflation(2+2+2+3)

Answer 29

Menu costs
-Firms and the government have to spend time/money changing menus/vending machines/parking meters/published prices

Shoe leather costs
-Consumers and businesses have to spend time finding out where the cheapest prices are after a period of inflation

Wage price spiral
-When there is inflation, workers are worse off in real terms as they have lower real spending power. This will cause them to demand a wage increase. However a wage increase will cause a firms costs to rise again, fuelling further inflation. This cycle may continue, leading to hyper inflation

Goods are less competitive abroad and will damage our current account

• If UK inflation is higher than other countries, our goods will be more expensive than goods from other countries - This will cause a reduction in the demand for our exports and an increase in the demand for imports which are cheaper
• there is less demand for UK goods. Because labour is an example of derived demand, it means that there is also less demand for labour - unemployment

Question 30

What are some benefits of price stability

Answer 30

Helps us know the prices of things and plan our spending and saving

Question 31

How can a government use fiscal policies to control inflation and achieve price stability(3+2)

Answer 31

To reduce demand pull inflation

• Government expenditure would be cut to reduce demand in the economy via the multiplier effect
• Direct taxes would rise. This would reduce disposable incomes and deter people from spending
• Indirect taxes would rise. This would increase prices and deter spending/demand

To reduce cost-push inflation

• Lower direct taxes on business
• Lower indirect taxes that have a big impact on businesses-eg fuel tax

Question 32

How can a government use monetary policies to control inflation and achieve price stability(2+1)

Answer 32

To reduce demand pull inflation

• Increase interest rates: encourages saving; deters borrowing; reduces business demand for investment; raises exchange rate so may reduce the demand for exports
• Reduce money supply - Makes it harder for banks to lend money to consumers and businesses

To reduce cost push inflation
-Lower interest rates as most firms have loans

Question 33

How can a government use supply side policies to control inflation and achieve price stability(2)

Answer 33

Remove minimum wage

Lower business taxes

Question 34

What are some benefits to inflation(2)

Answer 34

Low rate of inflation allows greater flexibility by allowing relative prices to adjust

Debters benefit as the real value of their debt goes down

Question 35

How do you evaluate whether inflation is beneficial(3)

Answer 35

Depends on the rate of inflation

• low rate is beneficial
• high rate benefits some individuals, but the costs outweighs the benefits for the economy