Government and the macroeconomy

Economic Terms

Local government

a government organisation with the authority to administer a range of policies within an area of the country

Macroeconomic aims of government

1. Economic growth

2. Low unemployment

3. Low inflation/ stable prices

4. Balance of Payment stability

5. Redistribution of income

Fiscal Policy

financial planning of revenues and expenditures of government

Monetary Policy

Is the use of interest rates, direct control of the money supply and the exchange rate to influence aggregate demand

Supply-Side Policy

Aim to increase economic growth by raising productive potential of economy

Economic Growth

is annual increase in level of national output, example the countries GDP

GDP Gross domestic product

is main measure of total value of all goods and services produced in a given period of time

Recession

is significant decline in

1. economic activity spread across economy

2. lasts more than few months

3. normally visible in real GDP growth

4. real personal income

5. employment

6. industrial production

7. Wholesale-retail sales

→ would cause an economy to produce at point that’s within PPC

Causes economic growth

1. discovery of more natural resources

2. investing in new capital and infrastructure

3. technical progress

4. increasing amount and quality of human resources

5. reallocating resources

Consequences of economic growth

• increase in output can improve living standards

• higher output and incomes increase government tax revenue

  • can increase government spending without increasing tax rates

• can increase pollution leading to depletion of non-renewable resources and damage natural environment

Types of Unemployment

1. Cyclical Unemployment

2. Structural Unemployment

3. Frictional Unemployment

4. Seasonal Unemployment

Cyclical Unemployment

occurs during recession due to falling consumer demand and incomes

→ firms reduce output & 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 goods/services

Frictional Unemployment

refers to transitional unemployment, which occurs when people are moving between jobs

Seasonal Unemployemnt

occurs because consumer demand for good/service changes with season

→ e.g no job for ski instructor when no snow/ ice

Measurment of Unemployment

• taking claimant count

• labour force survey

→ no unemployed persons/ labour force

Consequences of Unemployment

Personal:

1. loss income & reduced ability to buy goods/ services

2. unemployed people de-skill if long out of work

3. unemployed people may become ill or depressed

4. strain on family relationships & health service

Economical:

1. unemployment is waste of human resources

2. fewer goods & services produced

3. total output & income in economy is lower

4. government taxes revenue lowers

5. people in work pay more taxes

6. government spending on welfare rises

Policies reducing unemployment

1. expansionary monetary policy

2. expansionary fiscal policy

3. increase in quality & quantity of education & training

Inflation

general & sustained increase in level of process of goods/services in economy over period of time

Deflation

decrease in general price level of goods & services & occurs when inflation rate falls below 0%

Base year

firth year with which prices of subsequent years compared

Inflation rate

percentage in annual CPI

Measurment of CPI percentage

(weighted average price in year (x) / weighted average Price in base year) x 100

Causes inflation

1. demand pull inflation → caused by total demand rising faste than tot output, causing market prices to rise

2. cost push inflation → cost of production increases, so firms try to pass costs to consumers through higher prices

Causes deflation

1. fall in money supply

2. decline in confidence

3. lower production costs

4. technological advances

5. increase in unemployment

6. increase in real value of dept

Policies controlling inflation & deflation

1. contractionary fiscal & monetary policy for inflation

2. expansionary fiscal & monetary policy for deflation

3. supply-side policy can increase aggregate supply and thus control both inflation & deflation