Topic 1.1 The objectives of government economic policy

Question 1

Summary of main macroeconomic objectives

Answer 1

The government has 4 main macroeconomic objectives. These aim to provide micro stability, but also trade-offs between each other
They are
1. Economic Growth
2. Minimising Unemployment
3. Price Stability
4. Stable Balance of Payments on Current Account

Question 2

1. Economic Growth

Answer 2

Definition: An increase in the production/value of economic goods/services in a period of time.

Question 3

Short-run Economic Growth

Answer 3

Definition: when unemployed resources are used to maximise factors of production (on a PPF, where a point approaches the curve).

Question 4

Long-run Economic Growth

Answer 4

Definition: when more factors of production are used (makes PPF curve shift outwards)

Question 5

2. Minimising Unemployment (define unemployment rate)

Answer 5

Unemployment rate: the % of people in the labour force without a job but registered as being willing and available for work

Question 6

3. Price stability (define inflation)

Answer 6

Inflation: ‘the rate of change of average prices in an economy - as measured by the consumer price index (CPI)

Question 7

4. Stable balance of payments on current account

Answer 7

This measures the UK’s record of economic activities with other countries (imports and exports)
if imports > exports: deficit
if exports > imports: surplus

Question 8

Balance of payments equilibrium

Answer 8

means the country can sustainable finance the current growth (important for long-term growth)

Question 9

2 additional macroeconomic policies

Answer 9

5. Balanced Government Budget
6. Equitable distibution of income

Question 10

5. Balanced Government Budget

Answer 10

Ensured the government keeps control of state borrowing (when total spending = total receipts) - so the national debt doesn’t escalate

Question 11

6. Equitable (equal) distribution of income

Answer 11

Income and wealth should be distributed equitably so the gap between the rich and poor doesn’t escalate. Associated with a fairer society

Question 12

Unemployment vs Inflation

Answer 12

Short-run trade-off between the 2. As unemployment decreases, inflation increases. This is shown on the Phillips Curve.
The y-axis is the rate of inflation and the x-axis is the rate of unemployment. The curve is like 1/x just rop right but dips below x-axis.