Chapter-25 Flashcards
The macroeconomic aims of the government (19 cards)
What is economic growth?
Economic growth is an increase in the output of an economy and, in the long run, an increase in the economy’s productive potential.
What is potential economic growth?
Potential economic growth is an increase in an economy’s productive capacity.
What is actual economic growth?
Actual economic growth is an increase in the output of an economy.
What is aggregate demand?
Aggregate demand is the total demand for a country’s product at a given price level. It includes consumer expenditure, investment, government spending, and net exports (exports minus imports).
What is aggregate supply?
Aggregate supply is the total amount of goods and services that domestic firms are willing to supply at a given price level.
Why do governments aim for economic growth?
Governments aim for economic growth because it raises living standards through better nutrition, housing, and healthcare. It also helps achieve other economic aims by increasing employment, controlling inflation if output meets demand, improving trade through exports, and generating more tax revenue to support the poor.
What criteria do governments use to set economic growth targets?
Governments set economic growth targets based on the economy’s current output relative to its maximum possible output and expected increases in productive capacity.
What is meant by full employment?
Full employment refers to the lowest level of unemployment possible, where everyone who is willing and able to work can find a job, excluding those temporarily between jobs.
What is meant by being economically active?
Being economically active means being a member of the labour force, either employed or actively seeking employment.
What is the unemployment rate?
The unemployment rate is the percentage of the labour force who are willing and able to work but are without jobs.
Why do governments aim for low unemployment?
Governments aim for low unemployment because it is a waste of resources. Unemployed individuals suffer from low income, and the government may need to spend tax revenue to support them.
What criteria do governments set for unemployment?
Governments aim for a low rate of unemployment, not 0%, because some level of unemployment is unavoidable due to people changing jobs. The target rate varies by country and economic conditions, but in most cases, it is considered difficult to reduce unemployment below 3%.
What is price stability?
Price stability is when the price level in the economy does not change significantly over time.
What is inflation rate?
The percentage rise in the price level of goods and services over time.
What is balance of payments?
The record of a country’s economic transactions with other countries, including imports, exports, investments, and financial flows.
Why do governments aim for balance of payments stability?
Governments aim for balance of payments stability to avoid long-term debt accumulation from excessive imports over exports. If import expenditure exceeds export revenue, the country lives beyond its means, leading to debt. Conversely, if export revenue exceeds imports, the country may limit the consumption of imported goods, potentially reducing the variety and availability of products for its inhabitants.
What criteria do governments set for balance of payments stability?
Governments typically aim for export revenue to equal import expenditure. However, they may tolerate a small surplus or deficit over a short period. A deficit might occur due to increased imports of raw materials or capital goods, which could enhance the economy’s productive capacity in the long run. Short-term fluctuations in income, both domestically and abroad, can also lead to temporary deficits or surpluses without causing major concern.
How can full employment and economic growth conflict with other government aims?
Full employment and economic growth can lead to conflicts with stable prices and balance of payments stability. When unemployment is low, increasing output becomes difficult, which may cause inflation due to rising wages and production costs. Additionally, higher employment and output can raise incomes and increase spending on imports, potentially worsening the balance of payments if import spending exceeds export revenue.
Why do governments seek to redistribute income?
Governments aim to redistribute income to reduce poverty and its associated hardships. Without intervention, inequality can grow, as the rich have more access to education, savings, and opportunities. A large income gap can also lead to social unrest due to feelings of injustice among the poor.
