The measurement of macroeconomic performance Flashcards
What is the acronym for the macroeceonmic objectives
T - trade balance
I - low and stable inflation 2%(+-1%)
G - strong sustainable Growth
E - Employment (low unemployment, full employment)
R - Redistribution of Income (fairness)
S - Sustainability
What is Gross Domestic Product (GDP), and why is it important in measuring economic growth?
GDP represents the total value of all goods and services produced within an economy over a period and is a primary indicator of economic growth.
What is the difference between real and nominal GDP?
Nominal GDP measures output at current prices, without adjusting for inflation, while real GDP adjusts for inflation, showing true growth over time.
How is the Consumer Price Index (CPI) used to measure inflation?
CPI tracks average price changes in a “basket” of goods and services and is used to measure price stability by showing the rate of inflation.
What are the four main objectives of government macroeconomic policy?
Economic growth, price stability, minimizing unemployment, and a stable balance of payments on current account.
What are the main types of unemployment, and why does the government seek to minimize unemployment?
cyclical, structural, frictional, and seasonal. Reducing unemployment boosts output, increases tax revenue, lowers welfare costs, and reduces poverty.
Why might achieving full employment be challenging for the government?
Full employment can create inflationary pressure as higher demand for labour raises wages, which may drive up prices.
What is a common conflict between economic growth and price stability?
Rapid economic growth can lead to demand-pull inflation, conflicting with the goal of price stability.
How can reducing unemployment conflict with the goal of a stable balance of payments?
Policies that lower unemployment often boost domestic demand, increasing imports and potentially worsening the current account balance.
Why might there be a trade-off between economic growth and environmental sustainability?
Economic growth can increase production and resource use, leading to environmental degradation and conflicting with sustainability goals.
How does the Phillips Curve illustrate a conflict between unemployment and inflation?
The Phillips Curve shows an inverse relationship, suggesting that lowering unemployment may increase inflation and vice versa.
What is “stagflation,” and why is it challenging for policymakers?
Stagflation is the occurrence of high inflation and high unemployment simultaneously, making it difficult to tackle one issue without worsening the other.
What is the “natural rate of unemployment,” and how does it affect macroeconomic policy?
The natural rate is the level of unemployment where inflation is stable. It includes frictional and structural unemployment, guiding policymakers on the limits of reducing unemployment without causing inflation.
What are the causes of stagflation?
Supply-Side Shocks
-Sudden increases in production costs (e.g., oil price surges) reduce
aggregate supply (AS), leading to higher prices and lower output.
