3.3 Macroeconomic Objectives Flashcards

Flashcards covering key macroeconomic objectives, related economic concepts, measurement methods, causes, consequences, and trade-offs based on lecture notes.

Macroeconomic Objectives

Key goals for most governments, including Economic Growth, Low Unemployment, Low & Stable Rate of Inflation, and Sustainable Levels of Government Debt.

Economic Growth

A central macroeconomic aim of most governments, often targeting an annual sustainable rate of 2-3%.

Sustainable Growth

An economic growth rate of 2-3% annually, which is less likely to cause excessive demand-pull inflation.

Low Unemployment

A macroeconomic objective with a target rate for many economies between 2-5%, close to the full employment level of labour.

Natural Rate of Unemployment (NRU)

The lowest achievable level of unemployment in an economy, which includes frictional, seasonal, and structural unemployment, making 100% employment impossible.

Frictional Unemployment

Occurs when workers are temporarily between jobs, usually short-term.

Seasonal Unemployment

Occurs as certain seasons come to an end and labour is not required until the next season (e.g., fruit pickers).

Structural Unemployment

Occurs when there is a mismatch between jobs and skills in the economy, usually as the structure of an economy changes.

Low & Stable Rate of Inflation

A macroeconomic objective, typically measured by a target inflation rate of 2% using the Consumer Price Index (CPI), considered a symptom of economic growth.

Demand-side policies

Government policies used to ease demand-pull inflation.

Supply-side policies

Government policies used to ease cost-push inflation.

Sustainable Levels of Government Debt

A situation where the government's borrowing and debt levels are manageable, allowing repayments without placing their economy at risk.

Short-term Economic Growth

Occurs due to changes in any components of aggregate demand (AD), illustrated as a rightward shift in AD on an AD/AS diagram or movement closer to the PPC.

Aggregate Demand (AD)

The sum of all expenditures in the economy: Consumption (C) + Investment (I) + Government spending (G) + Net Exports (X-M).

Long-term Economic Growth

Caused by improvements to the determinants of long-run aggregate supply (LRAS), illustrated as a rightward shift in LRAS on an AD/AS diagram or an outward shift of the entire PPC.

Production Possibilities Curve (PPC)

A model illustrating short-term economic growth by moving from a point inside the curve and long-term economic growth by an outward shift of the entire curve.

Factors of Production

Inputs used in the production of goods or services to make an economic profit, whose quantity or quality improvements lead to long-term economic growth.

Economic Growth Rate

Measured by calculating the percentage change in the real GDP between two time periods (usually quarterly or annually).

Nominal GDP

The total value of goods and services produced in an economy at current prices, unadjusted for inflation.

Real GDP

Nominal GDP adjusted for inflation using the GDP deflator, reflecting changes in output rather than price levels.

GDP Deflator

An economic metric that accounts for inflation by converting output to a constant price level, used to calculate real GDP.

Constant Prices

Refers to price levels that have been adjusted for inflation (indicating real values).

Current Prices

Refers to nominal price levels, which are unadjusted for inflation.

Employment

The economic use of labour as a factor of production.

Unemployment

Someone is considered to be unemployed if they are not working but actively seeking work.

Labour Force

Consists of all workers actively working PLUS the unemployed (who are seeking work); excludes those economically inactive.

Full Employment

The ideal situation when everyone in the economy who is willing and able to work has a job, though 100% employment is unattainable due to the natural rate of unemployment.

International Labour Organisation (ILO) Survey

An extensive survey sent to households to measure unemployment, where respondents self-determine if they meet criteria for being unemployed (ready to work in 2 weeks, actively looked in 1 month).

Claimant Count

Measures unemployment by counting the number of people claiming job seekers allowance or unemployment benefits, with more stringent requirements than the ILO survey.

Underemployment

Occurs when workers want to work more hours than they currently work, or are working in a job that requires lower skills than they possess.

Hidden Unemployment

Occurs when workers give up looking for work after a long period and are no longer considered unemployed, often during severe recessions.

Real Wage Unemployment

Occurs when wages are inflexible at a point higher than the free-market equilibrium wage, typically caused by minimum wage laws.

Minimum Wage

A legally imposed wage level that employers must pay their workers, set above the market rate, which can cause real wage unemployment.

Cyclical (Demand Deficient) Unemployment

Caused by a fall in aggregate demand (AD) in an economy, typically during a slowdown or recession, leading firms to lay off workers.

Inflation

The sustained increase in the average price level of goods/services in an economy.

Deflation

Occurs when there is a fall in the average price level of goods/services in an economy, meaning the percentage change in prices falls below zero %.

Disinflation

Occurs when the average price level is still rising, but at a slower rate than before.

Consumer Price Index (CPI)

Measures the average price level by tracking the prices of a 'basket' of goods/services that an average household purchases each month.

Demand Pull Inflation

Inflation caused by excess demand in the economy, where an increase in aggregate demand (AD) raises the average price level.

Cost Push Inflation

Inflation caused by increases in the costs of production in an economy, leading to a rise in the average price level.

Costs of Inflation (Firms)

Includes uncertainty, delaying investment, and menu change costs (the expenses incurred by firms in changing their listed prices).

Costs of Inflation (Consumers)

Includes a decrease in purchasing power, a decrease in the real value of savings, and a fall in real income for those on fixed incomes.

Costs of Inflation (Government)

Inflation erodes the international competitiveness of export industries and may slow economic growth due to trade-offs in tackling it.

Costs of Inflation (Workers)

Workers demand higher wages to compensate for reduced purchasing power; if wage increases don't equal inflation, motivation and productivity may fall.

Demand-side Deflation (Bad Deflation)

Deflation caused by a fall in total (aggregate) demand in the economy, leading to a decrease in average price levels, unemployment, and reduced confidence.

Consequences of Demand-side Deflation (Consumers)

Consumers delay purchases, debt feels more burdensome, and the real cost of borrowing increases as real interest rates rise.

Consequences of Demand-side Deflation (Firms)

Firms lose confidence, delay investment, experience reduced profits, and may face bankruptcies.

Supply-side Deflation (Good Deflation)

Deflation caused by increases in the productive capacity of the economy, leading to a reduction in average price levels and an increase in national output (rGDP).

Consequences of Supply-side Deflation (Consumers)

Households gain confidence with rising output and falling prices, leading to increased consumption.

Consequences of Supply-side Deflation (Firms)

Firms gain confidence, increase investment, and benefit from boosted international competitiveness and exports due to falling costs.

Government Debt

The total amount of money that a government owes to creditors, including domestic and foreign entities.

Fiscal Sustainability

Ensuring that government debt levels are manageable long-term, allowing resources to be allocated towards public investments and social programs.

Inter-Generational Equity

Keeping government debt at sustainable levels to ensure a fair distribution of costs across generations, avoiding the burdening of future taxpayers.

Monetary Policy Effectiveness

Sustainable debt levels support effective monetary policy by avoiding upward pressure on interest rates.

External Vulnerability

Maintaining sustainable government debt reduces a country's susceptibility to external shocks and political control by external parties.

Debt-to-GDP Ratio

A measure of government debt relative to the country's overall economic output, calculated as (Total government debt / GDP) x 100.

Budget Deficit

Occurs when a government's total expenditures exceed its total revenues within a specific fiscal year.

Budget Surplus

Occurs when a government's total revenues exceed its total expenditures, enabling the repayment of outstanding debt.

Austerity Fiscal Policies

Contractionary government fiscal policies that involve raising taxes and reducing government spending to decrease a budget deficit or pay off national debt.

Crowding Out Private Investment

Occurs when increased government borrowing competes with private sector borrowing for limited savings, causing real interest rates to rise and private investment to decrease.

Intergenerational Burden

High national debt imposes a burden on future generations through higher taxes, reduced services, or limited fiscal space for their own challenges.

Conflicts Between Macroeconomic Objectives

Situations where policy decisions create trade-offs, meaning achieving one macroeconomic objective may come at the cost of worsening progress in another.

Trade-off: High economic growth and inflation

Increased economic growth can push the economy closer to full employment, bidding up prices for remaining resources and leading to inflation that may exceed the target rate.

Trade-off: High economic growth and environmental sustainability

Economic growth often increases pollution, negative externalities, and the depletion of non-renewable resources, with higher growth accelerating this depletion.

Trade-off: Economic growth and inequality

During periods of high economic growth, the profits received by owners of factors of production can increase disproportionately to any increase in workers' wages, leading to greater income inequality.

Trade-off: Low unemployment and low inflation

The closer an economy moves to full employment, the fewer workers are available for hire, leading to wage inflation which can increase overall inflation.

Short-run Phillips Curve (SRPC)

Observes a trade-off between unemployment and inflation in the short run: rising inflation is accompanied by falling unemployment, and vice versa.

Long-run Phillips Curve (LRPC)

Suggests there is no trade-off between inflation and unemployment in the long run; the curve is vertical at the natural rate of unemployment (NRU).

Natural Rate of Unemployment (NRU) (Long-run context)

In the long-run, it is the unemployment rate that prevails when the economy is operating at its full potential, consistent with non-accelerating inflation.