Edexcel Economics A-Level - Macroeconomic Objectives
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Questions and Answers

What is the likely impact of increased interest rates on the balance of payments?

  • Improvement due to decreased imports.
  • Worsening due to decreased exports and increased imports. (correct)
  • Improvement due to increased exports.
  • Worsening due to increased exports and decreased imports.
  • What is a potential long-term effect of successful supply-side policies?

  • Decrease in aggregate supply.
  • Increase in unemployment.
  • Reduction in short-term economic growth.
  • Decrease in long-term inflation. (correct)
  • How can reducing government spending and increasing taxes to reduce fiscal deficits impact income equality?

  • It will likely lead to increased equality as the government has more funds.
  • It will have a neutral impact on income equality.
  • It will likely lead to a more equal society as the poor make use of more government services
  • It will likely worsen income inequality as the poor are most affected by cuts to government services. (correct)
  • How might lower interest rates affect income distribution?

    <p>They will benefit the richest disproportionately, due to them holding a larger proportion of wealth in non-money assets. (C)</p> Signup and view all the answers

    Which of these is NOT an intended effect of supply-side policies?

    <p>Decrease aggregate supply. (D)</p> Signup and view all the answers

    What is a potential consequence of rapid economic growth as seen in China?

    <p>Increased environmental damage and pollution. (A)</p> Signup and view all the answers

    Why might India be experiencing balance of payments issues despite rapid economic growth?

    <p>Its enormous domestic market generates high demand for imports. (D)</p> Signup and view all the answers

    What does the Phillips curve suggest about the relationship between unemployment and inflation?

    <p>As unemployment decreases, inflation tends to increase. (C)</p> Signup and view all the answers

    What economic condition challenged the validity of the Phillips curve in the 1970s?

    <p>High unemployment and low inflation, known as stagflation. (A)</p> Signup and view all the answers

    What is a likely consequence of expansionary economic policies?

    <p>Increased inflation and a potentially worse balance of payments. (D)</p> Signup and view all the answers

    What is a typical effect of deflationary policies?

    <p>Reduced inflation alongside decreased output and employment. (D)</p> Signup and view all the answers

    What is the potential adverse consequence of continuously high interest rates?

    <p>Reduced long term investment and decreased future growth. (D)</p> Signup and view all the answers

    How does high employment affect businesses and wages according to the provided information?

    <p>Businesses compete for workers by offering higher wages. (D)</p> Signup and view all the answers

    What is the approximate long-run trend of economic growth targeted by the UK government?

    <p>2.5% (C)</p> Signup and view all the answers

    For the UK, what is the target rate for unemployment, accounting for frictional unemployment?

    <p>3% (C)</p> Signup and view all the answers

    Which of the following best describes the UK government's target for inflation, as measured by the CPI?

    <p>2% (C)</p> Signup and view all the answers

    Which statement reflects the importance of balance of payments equilibrium on the current account?

    <p>To sustainably finance the current account for long-term growth (C)</p> Signup and view all the answers

    If the UK inflation rate falls 1% outside of the target range, what action is required?

    <p>The Governor of the Bank of England writes a letter to the Chancellor of the Exchequer. (A)</p> Signup and view all the answers

    Which of the following is NOT a typical aim of a government's macroeconomic objectives?

    <p>Achieving maximum economic growth in the short term (A)</p> Signup and view all the answers

    Why is a balanced government budget a key macroeconomic objective?

    <p>It ensures the government keeps control of state borrowing, so the national debt does not escalate. (A)</p> Signup and view all the answers

    What is the main purpose of the macroeconomic objective of greater income equality?

    <p>To minimize the gap between the rich and poor and promote a fairer society. (D)</p> Signup and view all the answers

    Study Notes

    Edexcel Economics (A) A-Level - Theme 2: The UK Economy - Performance and Policies - 2.6 Macroeconomic Objectives and Policies

    • Governments intervene in the economy to improve economic performance. Key objectives include:

    • Economic Growth: A long-run trend of around 2.5% in the UK. Governments aim for sustainable growth, sometimes prioritizing development over growth in emerging economies.

    • Low Unemployment: Targeting an unemployment rate around 3%. Frictional unemployment is accounted for.

    • Low and Stable Inflation: The UK target is 2% measured using CPI. This promotes price stability for firms and consumers.

    • Balance of Payment Equilibrium: Maintaining a sustainable current account balance is crucial for long-term economic growth.

    • Balance Government Budget: Controlling government borrowing and ensuring debt doesn't escalate.

    • Protection of the Environment: Sustainable use of resources to avoid exploiting them for future generations.

    • Greater Income Equality: Reducing the gap between rich and poor.

    2.6.2 Demand-Side Policies

    • Demand-side policies: Manipulate consumer demand. Expansionary policies increase AD to boost growth, while deflationary policies decrease AD to control inflation.

    • Monetary Policy: Central banks control AD by adjusting base interest rates or the money supply.

    • Interest Rates: The MPC changes the official base rate (repo rate) to manage inflation. A rise in interest rates reduces AD due to higher borrowing costs, reduced investment and consumption, and increased savings. This also reduces demand for assets like stocks and shares and has a negative wealth effect.

    • Quantitative Easing: The Bank of England buys assets to increase the money supply and reduce pressure on banks. This is used in times of low demand.

    2.6.3 Supply-Side Policies

    • Supply-side policies: Focus on increasing the productive potential of the economy (shifting the LRAS curve to the right).

    • Market-based policies: Aim to remove barriers to market efficiency, like high prices or labor shortages.

    • Interventionist policies: Correct market failures, such as under-provision of education or investment in infrastructure.

    2.6.4 Conflicts and Trade-offs

    • Economic objectives: Often conflict. Growth might lead to environmental damage, while policies to control inflation might lead to higher unemployment. Other trade-offs exist between growth, income equality and inflation.

    • Policy conflicts: Expansionary policies (increasing AD) often lead to inflation, while contractionary policies (decreasing AD) can cause unemployment.

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    Test your understanding of the key macroeconomic objectives and policies discussed in the Edexcel A-Level Economics Theme 2. Topics include economic growth, unemployment, inflation, and governmental balance. Prepare to explore sustainable approaches for a balanced economy.

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