The objectives of government economic policy

Question 1

What are the four main macroeconomic objectives?

Answer 1

-Economic growth.

-Minimising unemployment.

-Price stability.

-Stable balance of payments on current account.

Question 2

What is Economic growth?

Answer 2

• In emerging markets and developing economies, governments might aim to increase economic development before economic growth.

-Which will improve living standards, increase life expectancy, and improve literacy rates.

Question 3

What is Minimising unemployment?

Answer 3

• The governments account for frictional unemployment by aiming for an unemployment rate around 3%.

-The labour force should also be employed in productive work.

Question 4

What is Price stability?

Answer 4

• In the UK, the government inflation target is 2 percent, measured with CPI.
• Aims to provide price stability for firms and consumers.

-If the inflation rate falls one percent outside this target, the Governor of the Bank of England has to write a letter to the Chancellor of the Exchequer to explain why this happened and what the Bank intends to do about it.

Question 5

What is the Stable Balance of Payments on current account?

Answer 5

• Governments aim for the correct account to be satisfactory, so there is not a large deficit. This is usually near to equilibrium.

-This means that the country can sustainably finance the current account, which is important for long term growth.

Question 6

What is a Balanced government budget?

Answer 6

• Ensures the government keeps control of state borrowing, so that the national debt does not escalate.

-Allows governments to borrow cheaply in the future if required, makes repayment easier.

Question 7

What is a Greater Income Equality?

Answer 7

• Income and wealth should be distributed equitably, so the gap between rich and poor is not extreme.
• Associated with a fairer society.

-The significance of each objective changes over time.

Question 8

Economic growth vs inflation

Answer 8

• Where when a economy is growing but then there are inflationary pressures inflicted from the average price level.

-This is true when there is a positive output gap and Aggregate Demand increases faster than Aggregate Supply.

Question 9

Economic growth vs the current account

Answer 9

• When there is economic growth, consumers tend to spend more money, this then lead to a high marginal propensity (more spending, less saving), and so there is a higher likelihood of more spending on imports.

-This then leads to the current account deficit to worsen.

-However, export-led growth like China, means that a current account can be run surplus and have high levels of economic growth.

Question 10

Unemployment vs Inflation

Answer 10

• There is a trade-off between the level of unemployment and the inflation rate.

-This is portrayed with a Phillips curve.

-As economic growth increases, unemployment falls due to more jobs.

-However, wages increase, led to more consumer spending and an increase in the average price level.