Government Economic Policy Objectives

Question 1

What are the four main macroeconomic objectives governments try to achieve?

Answer 1

• Strong economic growth
• Keeping inflation low
• Reducing unemployment
• Equilibrium in balance of payments

Question 2

What is economic growth?

Answer 2

An increase in the productive potential of an economy

Question 3

What are the different stages of the economic cycle?

Answer 3

Boom- When the economy is growing quickly
Recession- When there is negative economic growth for at least 2 consecutive quarters
Recovery- When the economy begins to grow again

Question 4

What is the trend rate of growth?

Answer 4

The average rate of economic growth over a period of both economic booms and slumps

Question 5

What is an output gap?

Answer 5

The difference between the level of actual output and trend output

Question 6

What are some benefits of economic growth?

Answer 6

• Decrease unemployment
• Higher wages for employees
• Increased Investment

Question 7

What are some costs of economic growth?

Answer 7

• Income inequality
• Deficit in the balance of payments
• Industrial expansion can lead to negative externalities

Question 8

What is a demand side shock?

Answer 8

A domestic or global situation that causes aggregate demand to rise or fall

Question 9

What is a supply side shock?

Answer 9

A domestic or global situation that causes aggregate supply to rise or fall

Question 10

What is cyclical unemployment?

Answer 10

When the economy is an a recession, demand falls so unemployment rises

Question 11

What is seasonal unemployment?

Answer 11

When the time of year effects the amount of employment. E.g. Christmas

Question 12

What is structural unemployment?

Answer 12

When there is a mismatch in skills between individuals looking for work and the work that is being offered

Question 13

What is frictional unemployment?

Answer 13

The unemployment that comes from workers moving from one job to another job

Question 14

What is cost push inflation?

Answer 14

Inflation which is caused by the rising costs of inputs of production

Question 15

What is demand pull inflation?

Answer 15

Inflation which is caused by excessive growth in aggregate demand

Question 16

What is the natural rate of unemployment?

Answer 16

The rate of unemployment when the labour market is in equilibrium

Question 17

What does the short run Phillips curve show?

Answer 17

The trade off between unemployment and inflation

Question 18

What is Fisher’s equation of Exchange?

Answer 18

MV = PT
M = Money Supply
V = Speed at which money is spent
P = Price Level
T = Total transactions in an economy

Question 19

What are the causes of a current account deficit?

Answer 19

• High levels of consumer spending
• Struggles when competing internationally
• External shocks

Question 20

What are the causes of a current account surplus?

Answer 20

• When the economy is in a recession, domestic producers are struggling, so international trade is a better option
• Low value of domestic currency, exports are cheap
• High interest rates

Question 21

What are the consequences of a balance of payments deficit?

Answer 21

• Could mean economy is uncompetitive
• Wealthy people will import more, long term this will cause problems
• Fall in the value of the currency
• Increased unemployment

Question 22

What are the consequences of a balance of payments surplus?

Answer 22

• Shows an economy is competitive
• Can lead to stagnation over prolonged periods of time
• Overreliance on exports

Question 23

How might the government try to correct a balance of payments deficit?

Answer 23

• Supply side policies to reduce structural problems
• Restrictions on imports
• Fiscal or monetary policy to reduce spending in the economy

Question 24

How might the government try to correct a balance of payments surplus?

Answer 24

Try to raise the value of their currency, reducing exports and increasing imports

Question 25

What do the capital and financial accounts show?

Answer 25

Asset transfers

Question 26

What is included in the capital account?

Answer 26

Transfers of non-monetary and fixed assets

Question 27

What is involved in the financial account?

Answer 27

Movement of financial assets, such as: - FDI - Portfolio investment - investment in financial assets such as shares - Financial derivatives - Contracts whose value is based on the value of an asset - Reserve assets - Financial assets held by the Bank of England

Question 28

Where is income from the financial account recorded?

Answer 28

Current Account

Question 29

What is the relationship between the current account and the capital and financial accounts?

Answer 29

The current account should balance to the sum of the capital and financial accounts

Question 30

What are long term flows?

Answer 30

When things such as FDI is often made when a country gains comparative advantage in producing something, which happens over a long period of time

Question 31

What are short term flows?

Answer 31

Also called hot money, due to speculation and people trying to quickly make money, such as moving money from one currency to another to try and make a profit through change of exchange rates

Question 32

What do governments use short term policies for?

Answer 32

To correct sudden problems , such as major unemployment caused by a recession

Question 33

Where is the natural rate of unemployment?

Answer 33

When the labour market is in equilibrium, when labour demand is equal to labour supply

Question 34

How can cyclical unemployment be reduced during a recession?

Answer 34

Demand side policies

Question 35

How can the government reduce the natural rate of unemployment?

Answer 35

Supply side policies that make the labour market more flexible, and reduce frictional and structural unemployment

Question 36

What is flexibility of labour determined by?

Answer 36

- Labour mobility - Wage flexibility - Flexibility of working arrangements

Question 37

How can labour flexibility be improved?

Answer 37

Scrapping NMW and limiting trade union power

Question 38

How can the government tackle frictional unemployment?

Answer 38

- Income tax cuts will increase incentive to find work quicker and work longer hours - Increased information about jobs will help to find jobs quicker - Reduction of benefits

Question 39

How can structural unemployment be reduced?

Answer 39

By implementing policies that reduce occupational and geographical immobility

Question 40

How can the government tackle structural unemployment?

Answer 40

- Investing in training schemes that help to improve skills - Giving subsidies to workers so that they can afford to move house to an area with more work available