2281 · 4.2
The macroeconomic aims of government flashcards
Revision flashcards for Cambridge 2281 The macroeconomic aims of government (syllabus 4.2). Flip, recall, then mark a real past-paper question.
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Four main macroeconomic objectives?
Low/stable inflation, low unemployment (full employment), economic growth, balance of payments equilibrium (and exchange rate stability).
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Inflation vs unemployment trade-off?
Short-run Phillips curve — lower unemployment may require accepting higher inflation; NAIRU marks the sustainable floor.
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Growth vs inflation conflict?
Demand-led growth beyond LRAS causes inflationary pressure — positive output gap.
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BOP vs domestic objectives?
Expansionary policy boosts growth but may worsen current account (higher M); contraction improves BOP but slows growth.
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Supply-side and objectives?
LRAS shifts right — raises potential growth and employment without demand-pull inflation.
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Why can't all objectives be met simultaneously?
Policy instruments have multiple effects — e.g. rate rise cuts inflation but may raise unemployment and slow growth.
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What is meant by 'sustainable economic growth' as a policy objective?
A rate of growth that can be maintained without creating other significant economic problems, particularly demand-pull inflation, for future generations. It refers to growth in the economy's productive potential (LRAS).
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Define the Natural Rate of Unemployment (NRU).
The rate of unemployment that exists when the labour market is in equilibrium. It includes frictional, structural, and seasonal unemployment, but excludes cyclical (demand-deficient) unemployment. It is the unemployment rate when the economy is at full employment.
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What is the Phillips Curve?
A curve illustrating the inverse relationship between the rate of inflation and the rate of unemployment in the short run. It suggests a trade-off between these two macroeconomic objectives.
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How can the pursuit of full employment conflict with the balance of payments objective?
Policies to achieve full employment (e.g., expansionary fiscal policy) increase national income. This leads to higher demand for imports, which can worsen the current account deficit, conflicting with the goal of a stable balance of payments.
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What is a potential compatibility between macroeconomic objectives?
Successful supply-side policies can create compatibility. For example, investment in education can reduce structural unemployment and increase productivity, which boosts long-run growth and improves international competitiveness, helping the current account, all without causing inflation.