Macroeconomic Policy Objectives

AS Economics

Aims and Objectives

Aim: Understand two macroeconomic objectives. Objectives: Define policy instruments and objectives Explain full employment Analyse full employment and economic growth as economic policies Evaluate the sustainability of policies

Starter
Define a policy instrument Define a policy objective

Policy Instruments and Objectives

Policy Objective: Governments major macroeconomic objectives. Policy Instruments: Techniques used to achieve policy objectives.

Full Employment
Everyone that wants a job can find one. Unemployment is a misallocation of resources. Could be increasing economic welfare by producing g/s. Government wants full employment because it leads to increased standards of living, positive externalities. Increase in tax revenues, decreases in consumption of demerit goods etc. More money for gov. to spend on increasing LRAS.

Full Employment
PRICE LEVEL AD4 AD3 LRAS

FE can be achieved by increasing AD.

AD1-AD2 increase in employment and some inflation. An increase to AD3 will take economy to FE level.

AD2 AD1

An increase beyond AD4 will be highly inflationary.

Re-Create on Whiteboards.

FE

REAL GDP

Full Employment
Keynes promoted use of increasing AD to increase employment. Using this method caused inflation and balance of payments deficits. UK goods became internationally uncompetitive and consumers bought cheaper foreign goods. Policy Trade Off. 60s & 70s governments used the demand side policy until inflation and deficit were too high, and then reversed its policies. (boom/bust policy)

Full Employment
Shift due to supply side policies. Education makes labour more employable and flexible to fill jobs. http://news.bbc.co.uk/1/hi/prog rammes/world_news_america/ 7649745.stm Output is increasing More employment, and prices falling. Making UK economy more competitive internationally. Re-create on white boards.
PRICE LEVEL LRAS1 LRAS2

AD

REAL GDP

Is China approaching a growth slowdown?

Economic Growth
http://news.bbc.co.uk/1/hi/programmes/newsnight/9650876 .stm Why should a government pursue the objective of economic growth?

Potential and Actual Growth

A shift in PPB represents potential growth.
Capital Goods
PPB2 PPB1 B

A move from point A to point B represents actual growth

Consumer Goods

Economic Growth
Government pursues growth in an attempt to increase GDP and therefore GDP Per Capita, and therefore standards of living. Is economic growth sustainable?

Economic Growth
At pt B there is a policy conflict between growth and inflation. Monetary Policy used to control inflation and restrict AD. At pt A interest rate will be low in an attempt to boost AD.
Trend Growth

GDP

Actual Growth A

Time

Economic Growth
Economists consider that it is supply side factors that are likely to cause economic growth. Government cannot affect all of the causes of economic growth. However it can input policies to encourage the private sector to stimulate growth.

Plenary
Economic growth is the crucial objective for governments to pursue 1) Define economic growth 2) Construct a diagram to illustrate actual and potential economic growth

3) Can the above statement be justified?