2.6.1 Possible macroeconomic objectives

What is the definition of economic growth?

An increase in the production of goods and services in an economy over time, typically measured as the percentage increase in real GDP.

What is a benefit of economic growth related to living standards?

Higher living standards through increased income and improved quality of life.

Example of economic growth improving living standards?

Rapid growth in China lifting millions out of poverty.

How does economic growth affect employment?

It creates more job opportunities as firms expand.

Example of economic growth creating employment?

Technology sector growth creating jobs in the U.S.

What is a cost of economic growth related to inflation?

Rapid growth can lead to rising prices.

Example of inflation caused by economic growth?

Hyperinflation in Venezuela.

What is a cost of economic growth related to the environment?

Increased production can harm the environment.

Example of environmental harm due to economic growth?

Deforestation in the Amazon.

What is the definition of low unemployment?

A large proportion of the labor force is employed, leading to higher income and production levels in the economy.

What is a benefit of low unemployment related to income?

More people earning wages.

Example of higher income from low unemployment?

Low unemployment rates in Germany contributing to high standards of living

What is a social benefit of low unemployment?

Reduced poverty and social unrest, contributing to social stability

What is a cost of low unemployment related to inflation?

It can drive wages up, leading to inflation.

Example/theory linking low unemployment to inflation?

Phillips Curve theory where lower unemployment leads to higher inflation.

What is a structural cost of low unemployment?

Skill mismatches, where not all workers have the skills needed for available jobs.

What is the definition of a low and stable rate of inflation?

Prices of goods and services rise slowly and predictably over time.

What is a planning benefit of stable inflation?

Predictability helps businesses plan for the future.

Example of an inflation target by a central bank?

The European Central Bank targeting 2% inflation.

How does stable inflation affect consumer savings?

Maintains purchasing power and protects savings.

What is a cost of low inflation related to investment?

It can lead to low interest rates, which may not always stimulate investment.

Example of a country facing low inflation and low interest rates?

Japan’s experience with low inflation and near-zero interest rates.

What is a risk if inflation becomes too low?

Deflation, which can harm the economy.

What is the definition of current account equilibrium?

A situation where the value of exports is roughly equal to the value of imports, avoiding large deficits or surpluses.

What is a benefit of a balanced current account related to stability?

Reduces reliance on foreign debt, contributing to economic stability

Example of a country with a stable current account?

Germany’s balanced current account contributing to economic stability.

How does current account equilibrium affect exchange rates?

It avoids large fluctuations in currency value.

What is a cost of relying on exports for equilibrium?

Export dependency, making the economy vulnerable to global downturns.

Example of export dependency?

South Korea’s dependence on exports makes it sensitive to global market changes.

What is a domestic cost of achieving balance in trade?

Consumption sacrifice, requiring reduced domestic consumption.

What is the definition of a balanced government budget?

When government revenues equal government expenditures over a fiscal period.

What is a benefit of a balanced budget related to debt?

Prevents the accumulation of national debt.

Example of a country using balanced budget policies?

Sweden’s fiscal policies aimed at balancing the budget.

How does a balanced budget impact investor confidence?

It attracts foreign investment by showing fiscal responsibility.

What is a cost of balancing the budget on public services?

May require cuts in public services or higher taxes.

Example of a country facing unrest due to budget cuts?

Austerity measures in Greece leading to public unrest.

How does a balanced budget affect government flexibility?

Reduces the government’s ability to respond to economic crises.

What is the definition of environmental protection?

Policies aimed at reducing pollution, conserving resources, and promoting sustainability.

What is a long-term benefit of protecting the environment?

Sustainable development ensures resources are available for future generations.

Example of a country investing in sustainable practices?

Denmark’s investment in renewable energy.

How does environmental protection benefit public health?

Reduces pollution-related health issues.

What is a cost of environmental protection related to business?

Regulations can increase production costs.

Example of regulation increasing costs?

Restrictions on fossil fuels affecting energy industries.

How can environmental regulations impact competitiveness?

Stricter regulations can make domestic firms less competitive internationally.

What is the definition of greater income equality?

A more equitable distribution of income across society, reducing the gap between rich and poor.

What is a social benefit of income equality?

Reduces social tensions and promotes fairness.

Example of countries with greater income equality and social cohesion?

Nordic countries with low Gini coefficients and high social trust.

How does income equality affect economic stability?

More equal societies tend to have more stable economies.

What is a cost of promoting income equality related to incentives?

High redistribution may reduce incentives to work and invest.

Example of incentive issues due to high taxation?

Debate over high taxation in France leading to wealth flight.

What fiscal cost is associated with income equality policies?

Requires significant government intervention and spending

What is the UK’s long-run trend rate of economic growth?

Approximately 2.5%.

What level of unemployment is considered full employment in the UK?

Around 3%, accounting for frictional unemployment.

What must the Governor of the Bank of England do if inflation strays more than 1% from the 2% CPI target?

Write a letter to the Chancellor explaining the cause and how the Bank will respond.

Why is achieving a current account equilibrium important for long-term growth?

It allows a country to sustainably finance its external trade and investment balances.

Why is balancing the government budget a macroeconomic objective?

It helps control state borrowing, limits national debt, and maintains creditworthiness for future borrowing.

What does protecting the environment as a macroeconomic objective involve?

Ensuring sustainable use of resources and preventing excessive pollution for long-run stability.

Why is greater income equality considered a macroeconomic goal?

It reduces the wealth gap, promotes fairness, and can enhance social cohesion.

How do governments manage demand during a recession or a boom?

By using monetary or fiscal policy—stimulating AD in a recession and reducing it in a boom to control inflation.