The objectives of government economic policy

• What are the four main macroeconomic objectives of the government?

  Economic growth, minimizing unemployment, price stability, and stable balance of payments on current account
• What is the long run trend of economic growth in the UK?

  About 2.5%
• Why do governments in emerging markets prioritize economic development before economic growth?

  To improve living standards, increase life expectancy, and improve literacy rates
• What unemployment rate do governments aim for to account for frictional unemployment?

  Around 3%
• What is the UK government's inflation target?

  2%, measured with CPI
• What happens if the inflation rate falls 1% outside the target?

  The Governor of the Bank of England must write a letter to the Chancellor of the Exchequer
• What does a balance of payments equilibrium on the current account indicate?

  It means the country can sustainably finance the current account
• What is the purpose of a balanced government budget?

  To keep control of state borrowing and prevent national debt escalation
• Why is greater income equality considered important?

  It leads to a fairer society by distributing income and wealth equitably
• How can economic growth lead to inflationary pressures?

  A growing economy may experience inflation when there is a positive output gap and aggregate demand increases faster than aggregate supply
• How does high consumer spending during economic growth affect the current account?

  It can lead to a worsening of the current account deficit due to increased imports
• What is the relationship between economic growth and the government budget deficit?

  Reducing a budget deficit requires less expenditure and more tax revenue, which can lead to a fall in aggregate demand and less economic growth
• What negative externalities are associated with high rates of economic growth?

  High levels of pollution and the usage of non-renewable resources
• What does the Phillips curve illustrate?

  The trade-off between the level of unemployment and the inflation rate in the short run
• How can supply-side policies affect the trade-off between unemployment and inflation?

  They can reduce structural unemployment without increasing average wages
• What are the potential conflicts and trade-offs between macroeconomic objectives?

  • Economic growth vs inflation
  • Economic growth vs the current account
  • Economic growth vs the government budget deficit
  • Economic growth vs the environment
  • Unemployment vs inflation
• What are the implications of a high marginal propensity to import during economic growth?

  • Increased spending on imports
  • Worsening current account deficit
  • Potential for export-led growth to mitigate effects
• What are the consequences of high economic growth on the environment?

  • Increased pollution
  • Higher carbon dioxide emissions
  • Greater usage of non-renewable resources