Macroeconomic Objectives Of Governements Flashcards
What are two other macroeconomic objectives that governments have?
Equal distribution of income
Protection of environment
What are the four main macroeconomic objectives that governments have?
Economic growth (rises in real GDP)
Control of inflation (target 2%)
Low unemployment
Equilibrium in the balance of payments on the current account
Explain the conflict between inflation and low unemployment?
Low unemployment can cause wage rates to rise since the supply for labour is low. The increase in wages means an increase in costs of production for firms, and so the general price level of goods and services increases too, thus causing high inflation. Therefore low unemployment can cause high inflation (higher than target 2%).
Explain the conflict between economic growth and the balance of payments?
As an economy grows, consumers are likely to demand more imports and producers have high domestic demand so don’t bother to export as much. This worsens the balance of payments.
An exception to this would be export led growth.
Explain the conflict between decreased unemployment and the sustainable environment?
As more people work, more damage to the environment will be done due to more cars on the road and higher output from firms and factories.
However more tax from higher incomes could be invested by the government to reduce pollution.
Explain the conflict between inflation and equilibrium on the balance of payments?
Low inflation should help to improve a balance of payments deficit, since UK prices will seem lower on the world trade market.
However, if the balance of payments is running a surplus (X>M) then control of inflationary n will not restore equilibrium in the sense of removing a surplus.
What is demand side policy?
Demand-side policy is a deliberate manipulation by the government of AD in order to achieve the macroeconomic objectives. The two types are fiscal policy and monetary policy.
