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: Government’s 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. OBJECTIVE 1

Full Employment 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. An increase beyond AD4 will be highly inflationary. Re-Create on Whiteboards. OBJECTIVE 1 LRAS FE PRICE LEVEL REAL GDP AD1 AD2 AD3 AD4

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 it’s policies. (boom/bust policy) OBJECTIVE 1

Full Employment Shift due to supply side policies. Education – makes labour more employable and flexible to fill jobs. rammes/world_news_america/ stm rammes/world_news_america/ stm Output is increasing More employment, and prices falling. Making UK economy more competitive internationally. Re-create on white boards. OBJECTIVE 1 LRAS2 PRICE LEVEL REAL GDP AD LRAS1

Is China approaching a growth slowdown?

Economic Growth Why should a government pursue the objective of economic growth? OBJECTIVE 2

Potential and Actual Growth OBJECTIVE 2 Capital Goods Consumer Goods A shift in PPB represents potential growth. A move from point A to point B represents actual growth A B PPB1 PPB2

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? OBJECTIVE 2

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. OBJECTIVE 2 Actual Growth Trend Growth GDP Time A B

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. OBJECTIVE 2

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? OBJECTIVE 2