Role Of The Government Flashcards
What are the government objectives (6)
Economic growth Price stability Full employment Trade Redistribution of income Sustainable environment
Explain the objective economic growth
High and stable
Important for raising living standards
Explain the objective price stability
Low rate of inflation
High inflation creates uncertainty in an economy
Explain the objective full employment
Low unemployment (4%)
Below full unemployment and wages start to rise
Unemployment is temporary
Explain the objective of trade
A balanced trade between exports and imports
A large deficit means income leaving the economy
Explain the objective redistribution of income
Reduces poverty
Costs the government to support poor households with welfare costs
Explain the objective sustainable environment
Pollution and congestion caused a depletion of resources
Which other objectives does higher economic growth conflict with (3)
Increases inequality of income
Damages the environment
Increases inflation and uncertainty
Which other objective does higher employment conflict with
Worsen the balance of payments as more people have jobs, higher income, but more imports
Government policies (3)
Monetary
Fiscal
Supply side
What is a monetary policy
Bank of England sets interest rates, exchange rate and money supply
What is a fiscal policy
Government spends on achieving government objectives with tax revenue
What is a supply side policy
Any policy which helps to increase the economy’s ability to produce goods and services
What is aggregate demand
Total demand for all goods and services in our economy
Equation for aggregate demand
C+I+G+X-M
C
Consumptions of households
I
Investment of firms
G
Government spenditure of government
What is aggregate supply
What would the government encourage firms to do
Total supply of goods and services in our economy
Encourage to supply more goods and services
Why might a government produce goods or services (4)
Public goods
Merit goods
Natural monopolies
Saving firms from thingy
Why are public goods produced by the government
Private sector unwilling to provide due to free rider problem
E.g. Defence law and order infrastructure
Why are merit goods produced by the government
Under provided by the private sector and generates positive externalities
Why are natural monopolies provided by the government
Prevent consumers from getting exploited
Why might the government privatise a good or service (2)
More efficient
Raises revenue
What is inflation
The persistent increase in general level of prices in an economy
It is how the government defines price stability
How is inflation measured
Annual % increase in the CPI
Inflation means…
Value of money falls
Why is it important to know what the inflation rate is (3)
So the government can control it
Firms/ workers can negotiate wages
Government can adjust pensions, welfare
How do we measure inflation
Create a basket of 650 goods/ services consumers by an “average” household
Collect all price information and set a base year (=100)
Give weights to each good/ service in household budget
Calculate the index and compare with year
