What are the government's policy objectives? (P161)
These are the targets that the government wants to achieve. They are: Full Employment, Economic Growth, Stable Prices, and Satisfactory Balance of Payments.
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What are policy instruments? (P161)
The techniques the government uses to achieve the policy objectives. These can be demand and supply side policies.
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What are the policy indicators? (P162)
These can be used to monitor the changes in the policy objectives. They include: the Claimant Count, GDP and the CPI
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What are the benefits of Full Employment? (P162)
Unemployment represents a waste of scare resources. It can increase economic welfare. Government will get a healthy income through taxes, whilst reducing benefit payments.
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How can Full Employment be achieved? (P162)
A shift of the 'AD' curve to the right will move the equilibrium closer to full employment. However this also leads to higher inflation and a loss of international competitiveness (prices of exports rise).
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Another way that Full Employment can be achieved? (P162)
A shift of the 'LRAS' curve to the right will increase the productive capacity of the economy, leading to more jobs becoming available. This is a better method as prices fall (rather than inflating), which also makes the UK more competitive.
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What are the benefits of Economic Growth? (P163)
It increases the standard of living of the population, as it increases GDP per head. It can reduce unemployment too.
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What are the possible disadvantages of Economic Growth? (P165)
Rapid growth can be unsustainable, leading to environmental problems for future generations. It also can lead to inflationary pressure (when actual growth is above trend growth).
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What are the problems with Inflation? (P166)
It is hard on groups with a fixed income (e.g. pensioners), as prices are rising whilst their income isn't. If interest rates are below inflation, lenders will loose out as funds are more expensive (causing a reduction in growth rates).
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What are some more problems with Inflation (follow the story)? (P166)
1) Consumers anticipate inflation, so buy more to beat it. This shifts 'AD' right, increasing inflation, 2) Worker's wage demands increase, so cost rise further ('SRAS' shifts left), 3) Prices rise so consumers turn to imports, 5) Unemployment rises
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If Inflation is this bad, why isn't the government target 0%, not 2%? (P166/167)
A zero level of inflation would not take into account the improvements of goods and services, so in real terms prices would be falling. This wouldn't provide and incentive to producers to improve their products.
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Why is the UK in a Balance of Payments deficit, rather than a surplus (P168)
The economy has moved away from manufacturing, into services, leading to an increase in the need to import what we would have once produced domestically. Also, the UK has an appetite for imports (in an extra £1 earned, over 50p is spent on imports).
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How does a Balance of Payments deficit lead to a 'credit crunch'? (P168)
The government is borrowing to fill the deficit. This isn't a problem when the gap is a small % of GDP as investors still have confidence. But when the gap grows confidence is lost. The government cuts domestic spending, as there is a credit crunch.
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Other cards in this set
Card 2
Front
What are policy instruments? (P161)
Back
The techniques the government uses to achieve the policy objectives. These can be demand and supply side policies.
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