Government Objectives

Question 1

What are evaluative points associated with government attempts to stimulate Economic Growth?

Answer 1

• To some extent economic growth is out of the hands of governments due to the economic cycle.
• Some economists argue the best way to stimulate growth is to allow market forces to work without interference.
• The rate of growth is not as important as the method of growth (jobless growth).
• Growth can have negative consequences.

Question 2

What are evaluative points associated with government attempts to control Inflation?

Answer 2

• The MPC is mainly limited to demand side policies which are no help for cost-push inflation.
• Raising interest rates to control inflation may have other negative impacts because interest rates are a blunt instrument.
• Raising interest rates general increases the value of a currency which may help inflation but may also cause balance of payments problems.
• If other countries are experiencing equal inflation to us then there are no competitiveness problems.
• A little inflation can be a good thing because it provides a buffer for deflation.

Question 3

Why can inflation be damaging to an economy?

Answer 3

• We may lose international competitiveness.
• People on fixed incomes are disadvantaged, or if nominal incomes do not increase at a rate equal to inflation.
• High inflation may cause the MPC to raise interest rates which may damage other areas of the economy.

Question 4

What are the six main macroeconomic objectives of government?

Answer 4

• Low unemployment.
• Controlled inflation (2±1%).
• Increased growth.
• Sustainable balance of payments.
• Improvements of income distribution.
• Protection of the environment.

Question 5

Why do countries want to achieve economic growth?

Answer 5

Economic growth generally has positive impacts on incomes and jobs which are desirable.

Question 6

How does a government attempt to tackle cyclical unemployment?

Answer 6

Generally a government may try to boost aggregate demand by increasing government spending, as there will be multiplier effects.

Question 7

What are evaluative points linked to the government tackling cyclical unemployment?

Answer 7

• Some economists argue that the multiplier effect is very small and that the debts caused by the government spending do not see a significant return.
• The little that the government can do has large time lags. By the time the policies effects are felt, the opposite is needed.
• Classical economists argue that the only reason this kind of unemployment exists is because workers will not accept lower wages.

Question 8

How might a government attempt to tackle structural unemployment?

Answer 8

The government should spend money on re-training workers and subsidising firms that are willing to re-train workers on the job.

Question 9

What are evaluative points associated with the government tackling structural unemployment?

Answer 9

• There is an opportunity cost to subsidising firms and individuals.
• Some people’s skills are so estranged from skills needed in the economy that re-training them would cost more than the benefits returned.
• In the long term a countries structural unemployment problems may well sort themselves out.
• If people know they will not be subsidised by the government they may take the initiative to re-train themselves.

Question 10

How might a government attempt to tackle frictional unemployment?

Answer 10

The government can improve information flows and extend the services currently offered by job centres.

Question 11

What are evaluative points associated with the government tackling frictional unemployment?

Answer 11

• Opportunity cost of spending when one considers the magnitude of the problem presented by this form of unemployment.
• Many people do not need help finding new jobs and job centres only service a small amount of the population.

Question 12

How might a government attempt to tackle classical unemployment?

Answer 12

Here the government may want to take a ‘laissez-faire’ approach, i.e. spend less rather than more and decrease it’s functions in the market.

Question 13

Why does a government wish to be sustainable on the balance of payments?

Answer 13

If money is constantly moving out if an economy it will become poorer, unemployment will increase and future generations will pay the cost of over-spending today.

Question 14

What are evaluative points associated with the balance of payments?

Answer 14

• Surpluses can be a problem as much as deficits as it can cause increased inflation.
• A floating exchange rate can solve the problem.
• A deficit in the balance of payments might be a sign that the economy is growing quickly.
• A deficit in the balance of payments might be a sign that the economy is building up potential output for the future by buying capital etc.
• Movements in goods and services are a tiny proportion of payments between countries, and capital flows for speculative or other investment purposes outweigh and problems in the ‘real’ economy.

Question 15

What is a floating exchange rate?

Answer 15

A floating exchange rate is one which rises or falls in response to changes in demand for and supply of currency. It is not manipulated by a government buying or selling currencies in the market.

Question 16

How might a government try to make the income distribution more equal?

Answer 16

• Increase taxes on high earners and profitable businesses.
• Increasing benefits to low income groups.
• Raising the minimum wage.
• Spending more money on schools and healthcare provided by the state.

Question 17

What are evaluative points associated with the government trying to fix income inequality?

Answer 17

• Raising tax on high earners acts a disincentive to work hard to earn more.
• Increasing benefits might reduce incentives for people to go out and find work.
• Raising the minimum wage can cause unemployment as firms find it hard to keep on as many workers as before.
• In some areas of the country, such as London, the National Minimum Wage has almost no effect because wages are above the rate anyway.
• When the government spends more on education or health there is not necessarily an improvement in standards.

Question 18

How might a government attempt to protect the environment?

Answer 18

• Through protective legislature such as the Kyoto Protocol.
• Education about how to be more environmentally friendly.
• Incentives for firms and individuals to be greener.
• Involvement in market-based schemes such as the EU carbon emissions trading scheme.

Question 19

What are some evaluative points associated with the government attempting to protect the environment?

Answer 19

• Climate change skeptics do not believe humans are causing climate change.
• Wind farms etc have a very high opportunity cost as they are relatively expensive.
• Bioethanol forces up food prices.
• Green taxes increase the costs of living for many, which may cause cost-push inflation.
• Why should BRIC countries forfeit benefits from fossil fuels which allowed the West to become rich?

Question 20

What are the three main government policy conflicts?

Answer 20

• Inflation Vs Unemployment.
• Economic Growth Vs Sustainability.
• Inflation Vs Balance of Payments.

Question 21

Describe the conflict between inflation and unemployment.

Answer 21

When a government tries to control inflation it tries to dampen aggregate demand. It may do this through taxes or the MPC may raise interest rates. This may prevent inflation, but it also decreases spending in the economy. This lack of spending may affect firms, causing them to have to lay off workers. These workers will now spend even less, causing more firms to have to lay off workers and so on.

Question 22

Describe the conflict between economic growth and sustainability.

Answer 22

When an economy grows, standards of living tend to rise. Since resources are finite, this improvement may damage the ability to have a high standard of living in the future, as too many resources may be consumed too quickly. The government aims for a rate of sustainable growth as any other amount of growth conflicts with other macroeconomic policies.

Question 23

What is sustainable growth?

Answer 23

Sustainable growth is growth that does not compromise the welfare of future generations.

Question 24

Describe the conflict between Inflation and Balance of Payments.

Answer 24

Although controlling inflation should make the economy more competitive and improve the balance of payments, often the methods of achieving our target levels of inflation are damaging to the balance of payments. For example, raising interest rates may control inflation but raise the exchange rate, making imports cheaper and exports more expensive.