2.6: Macroeconomic objectives

• What is a central macroeconomic aim of most governments?


  Economic growth
• What is the annual target rate of economic growth for many developed nations, including the UK?


  2−3%
• Why is a growth rate of 2−3% considered sustainable?

  It is less likely to cause excessive demand pull inflation
• How do politicians use economic growth as a metric?

  To evaluate the effectiveness of their policies and leadership
• What are some positive impacts of economic growth?


  Confidence, consumption, investment, employment, incomes, living standards, and government budgets
• Why is it impossible to achieve 100% employment?

  There will always be a level of frictional unemployment
• What is the significance of analyzing unemployment rates within different sections of the population?

  It highlights disparities such as youth unemployment and ethnic/racial unemployment
• How does unemployment relate to real GDP growth?


  Unemployment tends to be inversely proportional to real GDP growth
• Why is a low rate of inflation desirable?


  It is a symptom of economic growth
• What are the different causes of inflation that require different policy responses?


  Cost push and demand pull inflation
• What type of policies ease demand pull inflation?


  Demand-side policies
• What type of policies ease cost push inflation?


  Supply-side policies
• What is considered unstable inflation in the UK?


  An inflation rate of 4−5%
• Why is a low and stable rate of inflation important for firms?


  It allows firms to confidently plan for future investment
• What does the Balance of Payments (BoP) record?


  All financial transactions between a country and the rest of the world
• What do governments aim for regarding the Balance of Payments on the Current Account?


  Equilibrium
• What happens if exports exceed imports?


  It creates a current account surplus
• What happens if imports exceed exports?


  It creates a current account deficit
• Why is a current account deficit more problematic in the long run?


  It can lead to increased borrowing and loss of confidence from lenders
• What has been the traditional status of the UK's current account?


  It has traditionally run a small deficit
• How significant is the UK's current account deficit as a percentage of GDP?


  It is insignificant and has not been problematic
• What does the Government Budget include?


  Forecasted revenue and expenditure
• Where does government revenue come from?


  Sale of assets, taxes, and sales revenue from goods/services
• What does government expenditure include?


  All government spending such as public sector salaries and unemployment benefits
• What happens if expenditure exceeds revenue?


  There is a budget deficit
• How is a budget deficit financed?


  Through public sector borrowing
• What happens if the UK Government debt becomes too high?


  Lenders lose confidence in the Government's ability to repay the debt
• What must the Government do if lenders lose confidence in its ability to repay debt?


  Raise the interest rate offered to lenders
• What can reducing the deficit mean for the economy?


  Tough choices such as cutting public sector pay or raising taxes
• Why is the reduction of income inequality a high priority for the UK Government?


  High levels of income inequality create social unrest and can lead to revolutions
• How is income inequality measured?

  Using the Gini coefficient
• What is the Gini target for most developed economies?


  0.3−0.4
• Why is perfect income equality not desirable?


  It removes the incentive to work and study
• What is a natural outcome of unchecked capitalism?


  High income inequality
• What is the need for government intervention regarding income inequality?


  To maintain acceptable levels of income inequality
• What are the two categories of demand-side policies?

  • Fiscal policy
  • Monetary policy
• What does fiscal policy involve?


  The use of government spending and taxation to influence aggregate demand
• Who is responsible for setting fiscal policy in the UK?

  The UK Government
• When does the UK Government present its fiscal policies?


  When it delivers the Government budget each year
• What does monetary policy involve?


  Adjusting interest rates and the money supply to influence aggregate demand