Government and The Macroeconomy

Government: Local Role

Fund Local services (eg Garbage collection)

Government: National Role

Achieve macroeconomic goals (Eg Economic Growth)

Government: International Role

Trading of goods and services

Macroeconomic aims of the Government

Economic Growth, Low Unemployment, Low Inflation, Balance of Payments Stability, Redistribution of Income

Fiscal Policy

Use of Taxation and government spending to inluence aggregate demand

Budget

Financial planning of revenues and expenditures of the government

Reasons for taxation

• Finance public expenditure

• Discourage certain activities, eg taxes on cigarettes

• Discourage import of goods, tariffs are import taxes and can be levied as a % of the value of imports or a set tax on each item

• Redistribute income from the rich to the poor

• Achieve other macroeconomic objectives

Expansionary Fiscal Policy

Reducing taxes and increasing gov spending to boost demand - employment and output rise - may be used to reduce recession

Contractionary Fiscal Policy

Increasing taxes and reducing gov spending to reduce demand - may be used to reduce price inflation

Monetary Policy

Use of interest rates, direct control of money supply and exchange rate to influence aggregate demand

Expansionary Monetary Policy

Cutting interest rates - may be used during a recession, to increase employment

Contractionary Monetary Policy

Increasing interest rates - May be used to reduce price inflation

Supply-Side Policies

Aim to increase economic growth by raising productive potential of the economy

Economic Growth

The annual increase in the level of the national output ie the country’s GDP

Recession

Significant decline in economic activity spread across the economy for 6 or more consecutive months
A recession would cause the economy to produce at a point that is within the PPC (insufficient)

Unemployment rate formula

Number of Unemployed People / Labour Force

Cyclical Unemployment

Occurs during recession due to falling consumer demand & incomes - Firms reduce their output and lay off workers

Structural Unemployment

Caused by changes in industrial structure of an economy - entire industries close due to a permanent fall in demand for their goods/services

Frictional Unemployment

Transitional unemployment - when people move between jobs

Seasonal Unemployment

Consumer demand for goods/services change with seasons e.g. no job for a ski instructor when there is no snow

Inflation

General & sustained increase in the level of prices of goods/services in an economy over a period of time

Deflation

General decrease in the level of prices of goods/services in an economy over a given period of time - occurs when the inflation rate falls below 0%

Calculating Consumer price index

Base year - First year with which the prices of subsequent years are compared
Inflation rate - Percentage change in annual CPI

Causes of Inflation

Demand-Pull Inflation, Cost-Push Inflation

Causes of Deflation

• Fall in the money supply

• Decline in confidence

• Lower production costs

• Technological advances

• Increase in unemployment

• Increase in the real value of debt