Macroeconomic Objectives and Government Policies

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  • Created by: mczerniak
  • Created on: 22-09-21 10:23

Macroeconomic Goals

There are 6 macroeconomic goals, these include:

  • Economic Growth - Countries want to encourage increased output of a country. Economic growth only occurs when output increases and prices remain stable.
  • Controlled inflation - have stable prices (price stability), inflation affects factors such as employment and production of a country
  • High employment - high unemployment puts a financial burden on governments
  • Stable balance of payments - Try to have a balanced balance of payments and avoid surpluses or deficits.
  • Income redistribution - Spread wealth by taxing rich and giving to the poor (Robin Hood)
  • Environmental Policies - Governments want to make sure the environment is protected and that resources are used sustainably (so there's stuff left for future generations)
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Government as a producer

Governments provide jobs, merit, and public goods to society. The objectives of governments as a producer is to:

  • Protect public interest - provide what the private sector does not
  • Improve economy - Through investment
  • Support key industries - Industries that are important to the country
  • Manage macroeconomy - implement different policies to better the economic situation
  • Reduce inequality - support vulnerable people (jobless, old, etc.)

The government also plays the role of producer through:

  • Creating national champion industries - Big important companies in the economy
  • Running natural monopolies - run to avoid doubling of resources or protection of consumers from exploitation
  • Provision of public goods
  • Supplying merit goods
  • Providing welfare services
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Legislation and control

Governments implement laws and enact policies in order to:

  • Promote competition between small and medium enterprises.
  • Decrease externalities.
  • Prevent overcrowding in cities.

They can also regulate the private sector by enacting laws about:

  • The quality and safety of goods and services produced.
  • the right of employees.
  • the protection of consumers from defective/hazardous products.

Governments also can influence the location of a business in order to:

  • Revive economically depressed regions (areas with high unemployment).
  • Reform overcrowded areas with high pollution/congestion.
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Competition Policy

Governments aim to regulate the market and competition within that market. They do so in order to provide:

  • Wider choice for consumers
  • High price competition
  • Improvements in R&D investment

They do so by enacting anti-competition laws that prevent the following:

  • The formation of cartels - Businesses agreeing on staying out of each other areas and potentially agreeing on fixing prices etc.
  • The formation of monopolies - Monopolies result in one major producer/supplier in the market resulting in potential barriers to entry for other new businesses.
  • Predatory pricing - Reducing prices below production costs to prevent competition from entering.
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Forms and Impacts of Subsidies

Forms of subsidies include:

  • Guaranteed payments - Guarantees min price for producers.
  • Input subsidy - Makes inputs cheaper reducing the cost of production.
  • Grants to cover financial losses - Support of loss-making industries.
  • Bailouts - Financial support for companies facing bankruptcy.
  • Loans and grants - Loans at a low interest rate or provides grants for economically depressed areas.
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Arguments for and against subsidies

Arguments for subsidies include:

  • Decrease in price, helping control inflation
  • Consumption of goods and services that yield positive externalities
  • Firms make more profit, they can reinvest into R&D
  • Industries protected against failure
  • Help save jobs

Arguments against subsidies include:

  • Add to government expenses
  • Involve opportunity cost
  • Artificial protection of inefficient firms
  • Can distort free market mechanisms
  • Decisions about who gets subsidies can be arbitrary.
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Supply-side policies

Supply-side policies are long-term policies that aim to promote economic growth by targeting:

  • The efficiency of employees
  • Investment by firms
  • New job opportunities
  • The productivity of firms

The instruments of supply-side policies include:

  • Selective tax incentives - Tax reliefs etc, encourages investment and such.
  • Selective subsidies - Government pays businesses helping them with production costs and potentially increasing firm output.
  • Labor market reform - Restricting Trade Union power or lowering unemployment benefits to encourage employment.
  • Privatization - Since profit maximization is the main objective businesses will be more efficient.
  • Deregulation - Removal of international trade barriers, etc.
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Benefits and limitations of supply-side policies

Benefits of Supply-side policies:

  • Increase in Aggregate supply.
  • Lower Unemployment.
  • Improve economic growth.
  • Improve international competitiveness.

Limitations of Supply-side policies:

  • They are subject to time lags.
  • May be expensive.
  • Increase financial burdens on government and taxpayers.
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Fiscal Policy conflicts

Expansionary Fiscal Policy Effects:

Positive:                                                                   Negative:

  • AD Increases.                                                      > Inflation.
  • Output and GDP increases.                                 > Lower taxes result in more imports
  • Unemployment Decreases.                                 > Government debt increase.
  • More public/merit goods                                     

Deflationary Fiscal Policy Effects:

Positive:                                                                   Negative:

  • Helps Dampen Inflation                                     > Unemployment increases
  • Government receives more revenue                   > AD, output and GDP decrease
  • Lower disposable income                                   > Less public/merit goods                                
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Monetary Policy conflicts

Loose Monetary Policy Effects:

Positive:                                                                   Negative:

  • Investment up, Interest rate down.                    > AD increase can lead to inflation.
  • Cheaper currency, increase in exports.              > Imports might increase.
  • More money = bigger AD.                                > Foreign investment fall.
  • Achieves economic growth.                                     

Tight Monetary Policy Effects:

Positive:                                                  Negative:

  • Interest rate up. Inflation down.         > Interest up, Investment down.
  • Encourages saving.                            > Mortgages go up, purchasing power decreases
  • Cheaper imported raw materials        >Firms profit decrease, AD decrease                  
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