Chapter 25 - The macroeconomic aims of the government

What are the 5 macroeconomic aims the government tries to achieve?

• Economic growth

• Low unemployment / full employment 

• Stable prices 

• Redistribution of income

• Balance of payments stability 

What is economic growth? 

It is the annual increase in GDP that represents a long-term expansion in the productive capacity of the economy. 

How does economic growth appear on the PPC? 

Economic growth can be shown by an outward shift on the PPC, creating more producer and consumer goods.

How does unemployment occur?

It occurs when people who are willingly and actively seeking jobs but are unable to find work. 

What is inflation?

Inflation is the sustained rise in the general price over a given period of time

Why does the government aim to achieve economic growth? 

To raise the standard for majority of the population

Why does low unemployment or full employment help the government achieve macroeconomic aims?

Higher employment leads to greater GDP which increases the standards of living of most of  the population and shows greater efficiency in the use of the economy’s resources. 

What is the formula for unemployment rate?

Number of unemployed people / total people in labour force x 100

Why does the government set inflation rates?

To control economic activity

What does redistribution of income mean?

It refers to the macroeconomic aims of achieving greater equality in the distribution of income in an economy. 

What are the mediums to redistribute income? (TWS)

• Taxation

                         ~ impose tax on people with higher incomes 

• Subsidies

                        ~ providing better education for students so parents don’t have to pay so much 

• Welfare benefits 

                        ~ provide welfare benefits for poor people 

Why do all governments try to reduce income inequality?

Government redistributes income because widening the wealth gap means higher levels of poverty. Poverty and hardships restricts the economy from reaching its maximum productivity capacity which will not help achieve the macroeconomic aims of the government. 

What is the balance of payments? 

It’s a financial record of a country’s transactions with the rest of the world for a given period of time. 

What does it mean when the country has a large balance of payments deficit?

• The country is uncompetitive in international markets

• Unemployment rate increases 

• The standard of living reduces

What are the 4 possible conflicts between macroeconomic aims?

• Full employment vs stable prices 

• Economic growth vs balance of payment stability 

• Full employment vs balance of payment stability 

• Economic growth vs stable prices

Define demand - pull inflation

It occurs when the demand for goods and services exceeds the supply in the economy. While demand increases, the supply stays the same or drops which causes an upward pressure on the prices due to shortages. 

Define Cost - push inflation / wage - push inflation

It occurs when the overall prices increase due to increases in the cost of wages and raw materials.