Macroeconomic objectives/polices and their conflicts/trade offs

Question 1

Assess whether GDP growth should be a macroeconomic target

Answer 1

Macroeconomic target – an objective held by a countries government for the nation’s economy to reach, for example, the UK has four main targets: low unemployment, 2% inflation (+/- 1%), a balanced current account and positive GDP/economic growth. The current rate of GDP growth is 2.5% in the UK.

Prioritising GDP growth increased GDP growth increases consumer confidence improving standard of living. Increase in output means firms employ more so unemployment decreases so benefit costs decrease increasing real output.

PPF shows an increase in employment increases potential output due to GDP growth. Although GDP growth improves standard of living and wages, unequal distribution regarding the growth of an economy with the rich of the country benefitting much more than the poor can occur. 5% richest see a greater impact of GDP growth than the poorest 20% due to unequal distribution.

Also the decrease in unemployment forces firms to increase wages due to wage pressure decreasing profit margins. Another reason to priorities GDP growth is it helps reduce a governments debts.

Economic growth causes higher tax revenues and less to be spent on benefits like JSA also less spent treating mental health illnesses caused by unemployment therefore GDP growth helps reduce government borrowing and debt to GDP ratios, also it causes higher inflation rates so the real burden of national debt decreases. However the inflation caused can reduce savings due to the fall in the value of money – contributes to trade deficit.

Question 2

4 macroeconomic targets

Answer 2

economic growth, inflation, unemployment, balance of payments equilibrium on the current account

Question 3

Economic growth rate

Answer 3

2.5%

Question 4

Unemployment rate

Answer 4

3%

Question 5

Inflation rate

Answer 5

2% +/- 1% according to CPI measure of inflation

Question 6

3 other macroeconomic objectives

Answer 6

Balanced government budget - keep national debt low allowing them to borrow cheaply in the future

Protection of environment - sustainable use of resources and no excessive pollution

Greater income equality

Question 7

Economic growth vs inflation

Answer 7

A growing economy is likely to experience inflationary pressures especially when positive output gap and AD increases faster than AS and demand pull inflation

Question 8

Economic growth vs the current account with evaluation

Answer 8

During periods of economic growth national input increases increasing average disposable incomes and so consumption. In the UK consumers have a high marginal propensity to import so we can assume that imports are a normal good (YED>0) and so as incomes rise we import more worsening the balance of trade and the current account.
However export-led growth such as China means can run a current account surplus and have high levels of economic growth

Question 9

Economic growth vs the government budget deficit

Answer 9

Reducing a budget deficit required less expenditure and more tax revenue decreasing aggregate demand and growth

Question 10

Economic growth vs the environment

Answer 10

High growth = high negative externalities such as pollution due to more manufacturing and carbon dioxide emissions

High growth = higher incomes = more cars = more congestion = more pollution = worse environment

High growth = higher incomes = more consumption of consumer goods = overload renewable use too much non-renewable

High growth = higher incomes = consumption increases = aggregate demand increases = firms respond by producing more = demand for energy increases = burn more coal = more pollution = more negative externality

Question 11

Unemployment vs inflation

Answer 11

short run there is trade off illustrated with a Phillips curve (rate of inflation y axis, rate of unemployment x axis, L shape with curve going under x axis) - low unemployment high inflation

as economic growth increases, unemployment falls due to more jobs being created however wages increases increasing consumption caused demand pull inflation

The extent of this trade off can be limited if supply side policies are used to reduce structural unemployment which will not increase average wages

Question 12

When do policy conflicts and trade offs occur

Answer 12

when one macroeconomic policy has a larger impact than another which conflicts with the other policy or reduces its effectiveness

Question 13

Environment vs competitiveness

Answer 13

If green taxes are implemented such as carbon tax or there are minimum prices on pollution permits the competitiveness of domestic firms could be compromised as they are limited in their production

Question 14

Progressive taxes vs inflation

Answer 14

taxes to reduce inequality could lead to higher rates of inflation e.g. higher VAT increases price of goods for firms and consumers

Question 15

Fiscal vs monetary policy

Answer 15

Expansionary fiscal policy involves more government borrowing leading to a rise in interest and inflation rates

Question 16

Interest rate vs inequality

Answer 16

the low interest rate (0.25%) could affect the distribution of income. Savers only receive a small return on their savings

Question 17

All macroeconomic objectives, how to measure them and their success-fullness

Answer 17

1) Inflation - 2% +-1%, low stable, CPI, currently 2.3% so success, MPC interest rates and QE financial crisis
2) Balance of payments, equilibrium, in deficit so no however strong economy, Current acount deficit imports/exports
3) Low unemployment, 0%, ILO/claimant count 4.8% which is lowest for years but not 0%
4) Environmental awaress/sustainable growth - high levels of pollution, co2 emissions, increase in gov regulations but still unsuccessful
5) GDP growth - as much as possible, about 2% which is low compared to usual rates
6) budget equilibrium, currently deficit but stable
7) income equality, progressive tax system helps, benefit system helps, but UK has one of the highest income inequalities of developed countries

Question 18

Why does aggregate supply slope up

Answer 18

1) Diminishing marginal returns - each extra worker added gives less in production each time but costs the same so increases cost of production increasing prices
2) Trade union power - low unemployment means high wage pressure so workers demand higher wages increasing cost of production so firms raise prices
3) Least efficient workers - as get closer to full employment the least efficient workers/capital are used

Question 19

Evaluate the Phillips curve

Answer 19

In modern times there is no relationship between unemployment and inflation
Friedman said demand side policies cannot cause real economic growth whereas Philips curve says opposite