2281 · 4.1
The role of government flashcards
Revision flashcards for Cambridge 2281 The role of government (syllabus 4.1). Flip, recall, then mark a real past-paper question.
Card
Four main macroeconomic objectives?
Low unemployment, price stability (low inflation), economic growth, and balance of payments equilibrium on the current account.
Card
Phillips curve trade-off (short run)?
Lower unemployment may be associated with higher inflation — expansionary policy boosts jobs but risks demand-pull inflation.
Card
Growth vs price stability conflict?
Rapid AD growth raises output but may cause demand-pull inflation if the economy is near Yf.
Card
BOP vs domestic growth conflict?
Fast domestic growth increases imports; expansionary policy may worsen the current account deficit.
Card
Three main policy instruments?
Fiscal policy (G, T), monetary policy (interest rates, money supply), and supply-side policy (LRAS shifts).
Card
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.
Card
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.
Card
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.
Card
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.
Card
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.
Card
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.