Macroeconomic Objectives

Objectives

Economic
Growth

Definition

The rate at
which the
economy
grows

Measurement

Benefits

Problem of
not having it
(need to
know the
definition of
terms)

Real GDP

Increasing
living
standard
Govt has
more tax
revenue and
thus more
resource for
expanding
the ppf of
the
economy

Recession

Poverty
(relative vs
absolute)

Costs/Conseque
nces
(other
macroeconomic
objectives or on
different
stakeholders)
Disadv of having
economic
growth
-if econ growth
is carried using
solely market
force income
inequality
-more pollution
-may affect the
traditional
culture (eg
handicraft)
-increase
consumption of
demerit good;
resource
depletion
problem
Consequences
of having
recession/povert
y
-unemployment
problem
- deflation
- lower income
and thus lower

Causes of
the problem

How to solve the

problem?
Market force vs Govt
intervention

Falling AD

Use of AD-AS
diagram:
SR solutions: use of
monetary and fiscal
policy

Rising
production
cost
No increase
in resources
(even
decline in
resources)

Fiscal policy
Focus on Keynesian
multiplier
Effectiveness
between use of M and
F policy:
- Elasticities of
money demand
and investment
functions
(Monetaries
believe that Md is
inelastic and I is
elastic for the
policy to work)
- Keynesian will
focus on the size
of multiplier
- Direct vs indirect
(effect is more
general and rely
on the market

Full
employment

Unemploym
ent rate =
NRU which
includes
seasonal,
frictional
and
structural

Number
unemployed/t
otal workforce

If there is
economic
accompanie
d with
inflation
then more
employment
will be
generated

The state of

Unemploym
ent:
Demanddeficient Un
(cyclical Un)

Price
stability
(low
inflation
rate eg. 2%)

External

Maximum
output

X=m

Inflation
(disinflation)
-good
inflation
-bad
inflation
(inflationary
spiral,
stagflation)
Deflation
-good
-bad
(deflationary
spiral)

Trade deficit

consumption
lower living
standard
-lower income
- social unrest
-higher transfer
payment
(unemployment
benefits) less
resource for
govt to use for
other purposes
- producing
inside ppf
(productive
inefficiency)
- losing the
skills;
discouraged
labour force
Inflation
Encourage
consumption
Decreasing
purchasing
power living
std
Worsen income
distribution
(variable
income
earners/borrowe
rs will gain;
fixed income
earners/lenders
will lose)
deflation

External
shocks eg.
Financial
crisis (fall in
I or X or C)

forces)
Crowding in vs
crowding out
(fiscal policy)
Fine-tuning
problem for both M
and F policy

LR: supply side

policies
M: market force will
eliminate the
inflationary and
deflationary gaps- no
need for government
intervention as wage
is flexible downward.

Demand
Pull
Vs
Cost Push

(Solutions to Trade
imbalances is under
S3)

Balance

Income
equality
(economic
developmen
t)

foreign
trade In
which
exports are
equal to
imports

Low
disparity in
the
individual
income
levels

(trade
surplus
lesser of a
problem)

Gini
Coefficientcloser to 0,
more equal

Social
stability
Lower
relative
poverty
(Greater
consumptio
n for
majority)

Social
unrest,

Disadvantages
of income
equality:
-inefficiency
since the
rewards are not
proportionate to
the output of
producers

-Progressive tax on
profit and salary taxes
(affect incentive to
invest and to work:
production
inefficiency)
- Welfare payment
(eg. Unemployment
benefit): low incentive
to work (producing
inside ppf)