9708 · 5.1
Government macroeconomic policy objectives flashcards
Revision flashcards for Cambridge 9708 Government macroeconomic policy objectives (syllabus 5.1). Flip, recall, then mark a real past-paper question.
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Four main macroeconomic objectives?
Low unemployment, price stability (low inflation), economic growth, and balance of payments equilibrium on the current account.
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Phillips curve trade-off (short run)?
Lower unemployment may be associated with higher inflation — expansionary policy boosts jobs but risks demand-pull inflation.
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Growth vs price stability conflict?
Rapid AD growth raises output but may cause demand-pull inflation if the economy is near Yf.
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BOP vs domestic growth conflict?
Fast domestic growth increases imports; expansionary policy may worsen the current account deficit.
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Three main policy instruments?
Fiscal policy (G, T), monetary policy (interest rates, money supply), and supply-side policy (LRAS shifts).
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Why can't all objectives be met simultaneously?
Policy trade-offs, time lags, and external shocks mean improving one objective often worsens another in the short run.
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Define 'sustainable economic growth'.
An increase in real GDP that can be maintained over time without creating significant economic problems, such as high inflation, environmental damage, or a worsening of the current account deficit.
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What is the 'natural rate of unemployment'?
The rate of unemployment that exists when the labour market is in equilibrium. It consists of frictional and structural unemployment, and excludes cyclical (demand-deficient) unemployment. It is the lowest rate achievable without creating accelerating inflation.
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Why is the government's inflation target typically a low positive number (e.g., 2%) and not 0%?
A 0% target carries a high risk of tipping into deflation, which discourages spending. A small positive inflation rate 'greases the wheels' of the labour market, allowing for real wage adjustments, and gives monetary policy more room to manoeuvre.
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What does a 'satisfactory balance of payments position' usually mean?
It refers to avoiding large and persistent deficits or surpluses on the current account. The goal is to ensure the country can finance its international spending sustainably in the long run without facing a currency crisis or relying heavily on foreign debt.
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Give an example of a conflict between two macroeconomic objectives.
A conflict exists between reducing unemployment and controlling inflation in the short run (the Phillips Curve trade-off). Expansionary policies to boost aggregate demand and cut unemployment can lead to demand-pull inflation.
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What is the difference between actual and potential economic growth?
Actual growth is the percentage increase in real GDP, often by using up existing spare capacity. Potential growth is the increase in the economy's productive capacity (an outward shift of the LRAS or PPC), representing the maximum sustainable rate of output increase.
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How can a government pursue economic growth and a satisfactory BOP position simultaneously?
Through supply-side policies. Policies that improve competitiveness (e.g., education, infrastructure, deregulation) can boost the quality and quantity of exports and shift LRAS rightwards, allowing for non-inflationary growth and an improved current account balance in the long run.
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What is meant by a 'policy trade-off'?
A situation where achieving one macroeconomic objective comes at the cost of worsening another. For example, using expansionary demand-side policy to reduce unemployment may lead to higher inflation.