Macroeconomic aims of the government

Question 1

What is the total expenditure in a macroeconomy

Answer 1

It is the sum of:
- Consumer expenditure on consumer goods and services.
- Investment expenditure by firms on machinery/Capital.
- Public sector expenditure by govt. on capital and consumer goods and services.
- Exports of goods and services sold to oversea residents.

Question 2

What are the 4 main economic objectives?
+ Additional objectives

Answer 2

1. Economic growth in the total output and income of the national economy and increased standard of living.
2. A high and stable level of employment, and therefore and very low level of unemployment(Full employment).
3. A low and stable rate of inflation in the general level of prices.
4. A stable balance of international trade and payments.

Additional Objectives
- To reduce poverty and inequalities in income and wealth
- To reduce pollution and waste, protect the natural environment and encourage more sustainable economic growth.

Question 3

What is the use of demand side policies?

Answer 3

The policy instruments, used are:
- total public expenditure
- the overall level of taxation
- the rate of interest.

This is effective because:
- Consumer spending depends on disposable income after taxes. Profit taxes impact business incentives and firms’ investment in new equipment and production expansion.
- Increasing public expenditure can boost total demand and, therefore, stimulate higher output and employment in an economy.
- Rising interest rates may lead consumers to save more and borrow less for spending, while falling interest rates may prompt firms to borrow more for investment.
- Public spending and taxes can also be used to redistribute income and wealth from rich people to poorer people.

Question 4

What is the use of supply side policies?

Answer 4

Supply-side policies aim to increase an economy’s productive potential by boosting the total supply of goods and services, which can lead to higher economic growth and lower inflation. These policies involve reducing barriers to employment and productivity, as well as creating incentives for firms and workers to increase their output. Supply-side policy instruments will include:
- targeted public expenditures, for example providing government subsidies to firms to encourage them to fund the research and development (R&D) of new and more efficient production processes and products;
- targeted tax changes, for example reducing taxes on wages and profits to increase the reward from work and enterprise;
- new regulations and reforms, for example introducing legislation to outlaw unfair and anti-competitive practices by large, powerful firms.