Chapter 9 - Macroeconomic Objectives of Governments Flashcards
(40 cards)
What are the Six major macroeconomics objectives and why are they only objectives?
DIEGUB
Economic Growth.
Control of Inflation.
A reduction in unemployment (less than 2%).
Sustainability of flows on the balance of payments.
Making the Distribution of income more equal. (Top 10% should increase similarly to bottom 10%)
Protection of the Environment.
Policies enacted by the government to fulfil any of these objectives is likely to impact more than one objective. Opportunity costs are involved.
Why is economic growth seen as a macroeconomic objective?
A governments success is often judged on the level of economic growth. With economic growth generally comes an increase in incomes and jobs, yet, economic growth is often out of the governments control.
BRIC countries?
Brazil, Russia, India and China. Seen as the drivers of world growth in future years, with their increase in incomes and efficient output.
Emerging markets?
Countries that are currently growing and industrialising very quickly.
Trend in Growth?
The average rate of growth over a period of time.
What Evaluation points can be made about economic growth as a macroeconomic objective?
Growth can be out of governmental control. e.g. 2008 financial crash.
Some economists believe that governments cannot do much to stimulate growth and that letting markets work is the best way to control then economy.
Spare capacity can be partially attributed to the high levels of economic growth in developing economies.
The rate of growth isn’t as important as the method of growth. Growth can be jobless if capital is invested into machinery.
Growth can have negative consequences.
Spare capacity?
Unemployed resources in an economy, meaning an economy can grow very quickly. e.g a skilled labour force.
How can inflation be seen as damaging to an economy?
Comparative inflation rates effect international competitiveness.
People on fixed incomes or who’s wages don’t rise with inflation experience loss in real terms.
High inflation rates may lead the MPC to rise interest rates (tight monetary policy) which can effect the economy negatively.
Demand-pull inflation means spending is rising above sustainable levels. This can be caused by interest rates falling etc.
Cost-push inflation will increase inflation.
Tight monetary Policy?
When interest rates are kept high because of inflationary fears.
Cost-push inflation?
Inflation is caused by decreases in AS. When production costs are rising or firms are willing and able to produce less at any price level. Monetary Policy will not work as this is a supply side policy..
Demand-pull inflation?
Inflation caused by increased AD, meaning spending is rising above sustainable levels.
What Evaluation points can be made about inflation as a macroeconomic objective?
Relative importance to other objectives may be low.
Inflation can be adjusted by index linking.
Inflation can be caused by cost increases, so the MPC won’t be able to have much impact as they deal with demand- side polices such as interest rates and quantitative easing.
Raising interest rates to control inflation can have damaging effects on the economy. This is why interest rate changes are often seen as a blunt instrument. Other policies may be better than a change in interest rates.
If inflation relative to other countries is similar, international competitiveness will remain the same.
Too much focus on inflation resulting in a neglect of other objectives can be devastating for an economy.
Small levels of inflation can be good as it acts as a cushion to falling prices.
Index Linking?
When changes in pensions and wages are linked to inflation.
CPI?
Main measure of inflation in the UK.
What is the term ‘Blunt Instrument’ used for?
To describe policies that are unable to focus clearly on one economic problem, instead damaging large areas which might otherwise have flourished.
Why is reducing unemployment often perceived as tricky to achieve?
There are several types of unemployment meaning it is hard to impact all of them. Policies will be successful at each different type.
How is cyclical unemployment caused and what can the government do to reduce it?
AKA Demand deficiency unemployment. Occurs when there is a lack of spending within an economy. The government may attempt to increase AD, but there will be multiplier effects.
How can policy implemented to reduced cyclical unemployment be evaluated?
Some economist argue that the multiplier effect id very small. Ergo, the impact of G will be small, simply leading to future debt.
Time lags.
Classical economists argue that the reason this problem exists is because workers will not accept lower wages.
Demand Deficiency?
A lack of AD in an economy to reach full employment/ capacity.
Classical Economists?
Opposite of Keynesian economists. Believe there is little unemployment if free markets are left to work for themselves.
How is structural unemployment caused and what can the government do to reduce it?
Not much can be done. It may be better to offer re-training workers or subsidising firms willing to take on workers to be re-trained in the job.
How can policy implemented to reduced structural unemployment be evaluated?
Opportunity cost involved in subsiding firms.
May cost more to retrain workers than to give them benefits.
Overtime the structural problems may remove themselves. Not many people train to be a miner today.
If no subsidies are given, companies may retrain workers themselves.
How is frictional unemployment caused and what can the government do to reduce it?
When people are between jobs. Can be improved by increasing information flows and extending services offered by job centres.
How can frictional unemployment be evaluated?
If it isn’t a significant problem, money could be better spent elsewhere.
Many people can find jobs independently and only a small section of the workforce use job centres.
