4.2.1.1_-_The_objectives_of_government_economic_policy Flashcards
(35 cards)
List the four main macroeconomic objectives set out by the government
- Sustainable economic growth
- Minimising unemployment
- Price stability( stable inflation rate)
- Stable balance of payments on the current account (at equilibrium exports = imports)
// It is never possible for the UK government to achieve all macro objectives
What do the four main macroeconomic objectives aim to achieve?
Macro stability
What is macroeconomics?
The study of national, international and global markets. Looks at the policies used by governments to achieve macro economic objectives
What is a policy objective?
A target or a goal that a government wished to achieve or hit
Explain what sustainable economic growth looks is for the UK
The total supply of goods/services to grow at the same rate as total demand i.e. sustainable increase in GDP.
The long run trend of economic growth is about 2.5%. Governments aim to have sustainable economic growth for the long run.
What is GDP?
Gross domestic product is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.
How is economic growth objectives different to the UK in emerging markets and developing economies?
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.
How do governments look at minimising unemployement?
Governments aim to have as near to full employment as possible. They account for frictional unemployment by aiming for an unemployment rate of around 3%. The labour force should also be employed in productive work.
What is full employment?
Everyone who wants a job has on, plus some people where there is no long-term unemployment
What is CPI?
The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.
What is the government inflation rate target in the UK?
2%, measured with CPI
What does the government inflation rate target in the UK aim to do?
To provide price stability for firms and consumers which will help them make decisions for the long run.
What does the UK government aim for the current account to be?
Governments aim for the current account to be satisfactory, so there is not a large deficit. This is usually near to equilibrium
What does a deficit on the current account mean?
A deficit on the current account means that the value of imports is greater than the value of exports.
What does a surplus on the current account mean?
A surplus on the current account means that the value of imports is less than the value of exports.
What are the two main additional objectives of macroeconomic policy?
Balanced government budget
Greater income equality
What does a balanced government budget mean?
It ensures the government keeps control of state borrowing, so the national debt does not escalate. This allows governments to borrow cheaply in the future should they need to, and makes repayment easier.
What does greater income equality mean?
income and wealth should be distributed equitably, so the gap between the rich and poor is not extreme. It is generally associated with a fairer society.
How does time affect the importance of macroeconomic polices
The importance of each objective changes over time. i.e. SR and LR
What are the potential conflicts and trade offs between the key macroeconomic objectives?
// five conflicts
- Economic growth vs inflation
- Economic growth vs the current account
- Economic growth vs the government budget deficit
- Economic growth vs the environment
- Unemployment vs inflation
// Generally occurs in the short run
What are the potential conflicts and trade offs between economic growth and inflation?
A growing economy is likely to experience inflationary pressures on the average price level. This is especially true when there is a positive output gap and AD increases faster than AS.
What are the potential conflicts and trade offs between economic growth and the current account?
During periods of economic growth, consumers have high levels of spending. In the UK, consumers have a high marginal propensity to import, so there is likely to be more spending on imports. This leads to a worsening of the current account deficit. However, export-led growth, such as that of China and Germany, means a country can run a current account surplus and have high levels of economic growth.
What are the potential conflicts and trade offs between economic growth and the government budget deficit?
Reducing a budget deficit requires less expenditure and more tax revenue. This would lead to a fall in AD, however, and as a result there will be less economic growth.
What are the potential conflicts and trade offs between economic growth and the environment?
High rates of economic growth are likely to result in high levels of negative externalities, such as pollution and the usage of non-renewable resources. This is because of more manufacturing, which is associated with higher levels of carbon dioxide emissions.
