Macro Objectives

Question 1

Macroeconomics Objectives x7

Answer 1

• Low and stable INFLATION
• Low UNEMPLOYMENT
• High and sustained ECONOMIC GROWTH
• Balanced BALANCE OF PAYMENTS
• Minimal INEQUALITY
• Low GOVERNMENT BORROWING/balanced budget
• ENVIRONMENTAL SUSTAINABILITY

Question 2

Trade-offs between macroeconomic objectives

Answer 2

• high growth = high inflation
• low unemployment = high inflation (phillips curve)
• high growth = +incomes = +Md = -BoP
• high growth = rich benefit more i.e. benefits remain the same = high inequality
• high growth = +externalities = -enviromental sustainability

Question 3

Chains for short run Phillips curve x2

Answer 3

Unemployment falls reducing the supply of labour = Firms have to compete for fewer workers and workers gain more bargaining power = Wages rise = Firms costs rise = Pass on to consumers

OR

Unemployment falls increasing disposable incomes = Increasing consumption = Increasing AD = Demand-pull inflation

Question 4

Chains for long-run Phillips curve x2

Answer 4

In long run firms costs rise (overtime and unproductive labour) = Reduces SRAS (-short run economic growth) = Increases unemployment

OR

Unemployment falls and inflation rises = In long run workers realise real wage rate has not risen = Demand higher wages = Increase real wage unemployment

Question 5

Balance of Payments

• Definition

Answer 5

A record of all financial transactions made between consumers, businesses and the government in one country with others.

Question 6

Balance of Payments

• Accounts

Answer 6

Current Account:

• Balance of trade in goods
• Balance of trade in services
• Net primary income (interest, profits, dividends from FDI and migrant remittances)
• Net secondary income (EU contributions, overseas military and development aid etc.)

Capital Account:

• Transfers of ownership of fixed assets
• Transferable contracts (e.g. patents, copy-right, leases etc.)

Financial Account:

• FDI
• Portfolio (debt and equity)
• Banking flows (hot money)

Question 7

Factors that affect the BoP

• Demand-side
• Supply-side

Answer 7

Demand-side:

• Incomes abroad and domestic
• Business cycle abroad and domestic
• Exchange rate

Supply-side:

• Investment = quality and reliability
• Inflation
• Corporation tax
• Raw material costs
• Wage rates
• Productivity (i.e. labour)

Question 8

How does the government fund a current account deficit?

Answer 8

• Attract FDI (financial)
• Sell debt i.e.bonds (financial)
• Expenditure switching and reducing (current)

Question 9

Types of Unemployment Definitions

Answer 9

Voulentary

• Structural Unemployment: mismatch of skills between unemployed and available jobs.
• Frictional Unemployment: time delays when finding new employment
• Seasonal Unemployment: when people are unemployed a particular times of the year, due to demand for labour being lower than usual
• Real-wage Unemployment: real wages are set above the equilibrium rate, creating an excess supply of labour

Involuntary:

• Cyclical Unemployment: a lack of aggregate demand and therefore demand for labour, because it is a derived demand