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 internationallyuncompetitive and consumersbought cheaper foreign goods.

• Policy Trade Off.• 60s & 70s governments used the

demand side policy until inflation anddeficit 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.

• http://news.bbc.co.uk/1/hi/programmes/world_news_america/7649745.stm

• Output is increasing• More employment, and

prices falling.• Making UK economy more

competitive internationally.• Re-create on white boards.

OBJECTIVE

1

LRAS2PRICE LEVEL

REAL GDP

AD

LRAS1

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?

OBJECTIVE

2

Potential and Actual GrowthOBJECTIVE

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 GrowthGDP

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