4.1 Government macro economic intervention

Macro economic aims of the government

Economic growth

Full employment/ low unemployment

Stable prices/ low inflation

Balance of payments stability

Redistribution of income

Environmental Sustainability

Macro economics

Study of the whole economy for example unemployment

Micro economics

Study of individual economic agents like firms, households and individuals

Economic growth

Increase in the amount of goods and services the economy produces

Full employment/ low unemployment

Keeping as many willing and able people in work as possible

Stable prices/ low inflation

Price level in the economy not changing significantly overtime

Balance of payments stability

Record of payments received from selling exports and its expenditure on imports.

Redistribution of income

Taking income from one group the rich and giving it to another group the poor to reduce inequality and the gap between rich and poor

Environmental sustainability

Conserve the natural world in a healthy state

Types of economic growth

Actual economic growth

Potential economic growth

Actual economic growth

Increase in the country’s GDP/ output of the country in the short run

Potential economic growth

Increase in the economy’s productive potential in the long run

Actual economic growth on PPC

Movement within the PPC from a point inside the curve to on the curve

Potential economic growth on the PPC

Outward shift of the PPC

Aggregate Demand

Total demand for a country’s goods and services at a given price level

Aggregate demand formula

Consumer expenditure + Investment + Government Spending + (Exports - Imports)

Causes of increase in aggregate demand

Increase in Population

Fall in interest rate

Lower exchange rate

Greater consumer and business confidence

Aggregate Supply

Total amount of goods and services that domestic firms are willing to supply at a given price level

When is aggregate supply elastic and inelastic?

When they are significant unemployed resources, firms can increase output without a significant increase in costs and prices so aggregate supply will be elastic

When the economy approaches full employment resources become scarcer so firms compete for resources increasing cost of production and price level aggregate supply becomes inelastic

At full employment its perfectly inelastic because the economy can not increase output further using its existing resources

Increases in aggregate supply

Costs of production fall

Quantity of resources increase

The quality/ productivity of resources increase

What can an increase in Aggregate demand cause on the economy

Actual economic growth, increasing the country’s output

Increase in price level

Increase in productive capacity causes

Potential economic growth resulting from increase in quality or quantity of factors of production

Full employment definition

Lowest level of unemployment as those who are able and willing to work can find employment

Criteria set by governments for unemployment to achieve full employment and why

3% unemployment as even with demand for labour equaling supply of labour there will be some workers changing jobs and being unemployed for a short period of time

Inflation

Substantial rise in the general level of prices in the economy

Why does the government aim for price stability?

Ensures greater economic certainty and prevents the country’s products from losing international competitiveness

How may the government redistribute income

Taxes

Spending

Unemployment benefits

Government expenditure on Healthcare and education so they are provided at a subsidized price for the poor

Why may the government not aim for perfectly equal distribution of income

Taxing the rich too heavily and providing too generous benefits may act as a disincentive too effort and enterprise

Why does the government care about Balance of payments stability

If the expenditure on imports exceeds revenue from export for a long time the country will go into debt as it will be living beyond its means

Balance of payments stability criteria for most country’s

Value of exports to be equal to the value of imports so the what the country earns from exports is equal to what they spend on imports

Expenditures on imports exceeding revenue from exports

Balance of payment deficit

Expenditures on exports exceeding revenue from imports

Balance of payment surplus

Why might the government not be concerned about a surplus or deficit

Only lasts a short period of time

Reasons for fluctuations in balance of payment stability

Increase in the imports of raw materials and capital goods as it will increase the economy’s ability to produce more goods and services to sell at home or abroad will cause deficit

Fluctuations in income at home and abroad

Environmental Sustainability Involves

Not depleting non renewable resources

Cutting levels of pollution

Reducing green house gas emissions to limit global warming

Reducing loss of bio diversity

Why do governments aim for environmental sustainability

To protect their country and others from a decline in the quality of the environment

Reduce negative effects of global warming, heat waves, storms, floods, droughts and rising sea levels.

Prevent loss of life and infrastructure, destruction of crops and spread of disease

Ensure environmental is available in healthy state for future generations

Reduce use and depletion of non renewable resources by making greater use of renewable resources

Targets of environmental sustainability

Prevent global temperature rising above pre industrial levels

Achieve global net zero greenhouse gas emissions by 2050, net zero meaning greenhouse gas emissions matching capture of such by natural means

Conflicts in between government aims

Economic Growth vs Low Inflation

Economic Growth vs Balance of Payments Stability

Low unemployment vs Inflation

Economic Growth vs Low inflation explained

If the economy grows due to excessive consumer demand, this will cause the aggregate demand to increase, causing the aggregate demand curve to shift to the right, increasing prices, creating inflation to rise in the economy.

If government try to deflate economy to control inflation, this may limit ability to achieve economic growth

Economic growth vs Balance of payments stability

Government may try to decrease expenditures on imported goods through a rise in income taxes which could also decrease disposable income decreasing spending on domestically produced products. This will decrease aggregate demand causing it to shift to the left inward causing output to be reduced slowing down economic growth of the economy.

Low Unemployment vs Inflation

If government increase employment then the disposable income will increase causing increase in disposable income causing increase in consumer expenditure and investment causing increase in aggregate demand casing it the aggregate demand to shift to the right causing increase in price causing inflation

If government try to reduce inflation using deflationary policies like higher taxes or interest rate then there will be a fall in investment and consumer expenditure causing the aggregate demand to shift to the left so firms produce less and need less workers causing an increase in unemployment