Topic 2: Economic policy and financial regulation Flashcards
What are the key macroeconomic objectives?
Most governments aim to achieve four key economic objectives; their political beliefs shape the way they go about achieving these objectives and the relative importance they give to each. They are known as macroeconomic objectives because they concern economic aggregates, ie totals that give us a picture of the economy as a whole, as opposed to microeconomic objectives that concern individual firms or consumers.
INFLATION
A sustained increase in the general level of prices of goods and services,
resulting from “too much money chasing too few goods”. In more formal
economic terminology, it can be defined as a situation where the rate
of growth of the money supply is greater than the rate of growth of real
goods and services
DISINFLATION
A fall in the rate of inflation, ie prices are still rising, but less quickly
than they were
DEFLATION
A general fall in the price of goods and services. In other words, the
inflation rate is below zero per cent – a negative inflation rate.
KEY MACROECONOMIC OBJECTIVES
Price stability, low unemployment, satisfactoryt econoomic growth, balance of payments equilibrium.
Price stability
involves a low and controlled rate of inflation. It does not mean, however, that zero inflation is desirable and there is a body of economic opinion that believes that moderate inflation can stimulate investment, which is good for the economy
Low Unemployment
involves expanding the economy so that there is more demand for labour, land and capital
Balance of payments equilibrium
a situation in which expenditure on imports of goods and services and investment income going abroad is equal to (ie in equilibrium with) the income received from exports of goods and services and the return on overseas investments. The exchange rate of the country’s currency is linked to the balance of payments, and most governments aim to keep the price of currency stable at a level that is not so high that exports will be discouraged but not so low as to increase inflation
Satisfactory economic growth
the output of the economy is growing in real terms over time and standards of living are getting higher
The four objectives given above tend to fall into two pairs:
1.policies to reduce unemployment will also boost growth;
2.measures to reduce inflation will also help to improve the balance of
payments
RECESSION
A significant decline in economic activity over a sustained period.
Technically, it is two consecutive quarters of negative economic growth
as measured by a country’s gross domestic product (GDP)
GROSS DOMESTIC PRODUCT (GDP)
GDP is a measurement of a country’s overall economic activity. Technically
it is the monetary value of all the goods and services produced within the country (ie ‘domestically’) in a given period, eg one year.
Over time, economies typically go through four main phases:
Recovery and expansion, boom, conraction or slowdown and recession.
How is economic activity measured ?
By the fall and rise in GDP
Recovery and
expansion
Interest rates, inflation and unemployment are low.
Consumers have money to spend. Demand for goods
and services rises, pushing prices up. Share prices
improve as businesses flourish
