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government macroeconomic policy objectives 🎯 Type notes Knowledge review Year 2024 price stability 🏁 3 reas...

government macroeconomic policy objectives 🎯 Type notes Knowledge review Year 2024 price stability 🏁 3 reasons why a government would not aim for a 0 inflation rate 1. any measure of inglation tends to overstate any rise in prices 2. to aim for zero inflation may result in deflation 3. a low and stable rise in prices caused by higher spending is likely to encourage firms to increase their output inflation target 🎯 the inflation rate a central bank is set to achieve its effects are: make a central bank more accountable reduce inflationary expectations firms, workers and households, they may act in a way that does not push up prices as they have confidence in a central bank’s ability to meet its target example: if workers think there will be price stability, they may not call for high wage rises low unemployment 👍 3 advantages of low unemployment 1. high output 2. high tax revenue government macroeconomic policy objectives 🎯 1  3. low expenditure on unemployment benefit what do governments try to ensure ? that workers only experience short term unemployment so that they don’t lose their skills and work habits how do they seek to achieve this? by promoting labour mobility through training schemes economic growth 💹 why not negative economic growth? unemployment may increase with fewer goods and services, living standards may decline why not too high a rate of economic growth? an economy could overheat AD increasing faster than AS pressure could be put on resources inflationary pressure may build up entrepreneurs may become over-optimistic and may set up firms that do not have a long-term future households may expect their incomes to continue to increase at a high rate → encourage them to take out loans that they will struggle to repay if their expectations are wrong factors that determine what would be a good growth rate for its economy 🦜 1. changes in size of the labour force 2. changes in productivity 3. advances in technology government macroeconomic policy objectives 🎯 2  price stability 💲 introo when does price stability occur? when prices rise only by a small percentage and there is an avoidance in fluctuations of price level in the economy what is inflation? a sustained increase in the general price level leading to a fall in the purchasing power or value of money when does deflation occur? when the rate of inflation becomes negative this means that… the general price level is falling over time, leading to an increase in the real value of money!! when does disinflation occur? when the rate of inflation is positive but decreasing over time what is creeping inflation? a low and steady rise in prices what is hyperinflation? considered to be higher than 50% per month what is Consumer Price Index (CPI) measures the rate of inflation or changes in the cost of living over time calculating inflation rate annual average method compares the levels of prices during a twelve month period year-on-year method the percentage change in the price level for a given month with that of the same month of the previous year [(final-initial)/intial x100] 💲 price stability 1  measurement of inflation and deflation 1. select a base year (a year in which nothing unusual has happend) 2. carry out a survey to find people’s spending patterns 3. attach weights to the different categories 4. find out the price changes 5. multiply weights by price changes → the total will give you the change in the consumer price index causes of inflation 🤲 demand-pull inflation when prices are pulled up by increases in AD and that are not matched by equivalent increases in AS causes: depreciation of exchange rate → increases prices of imports and reduces foreign price of exports. If exports grow and imports don’t, AD will rise shifting AD curve outwards, increasing prices and output reduction in government spending or direct taxation → consumers will have more disposable income, causing consumption to increase, shifting AD outwards. Higher gov spending leads to extra demand in circular flow of income, increasing AD monetary stimulus or fall in interest rates → gov printing more money increases the money supply. A fall in interest rates may stimulate too much demand, since the cost of borrowing is reduced more people will be willing and able to increase consumtion and investment today, causing an increase in AD faster economic growth in other countries → export sales provide an extra flow of income and spending into the country’s circular flow, increasing net export shifting AD outwards and so the general price level 💲 price stability 2  🫱 cost-push inflation when prices are pushed up by increases in the cost of production it is illustrated by an inward shift of the AS curve this fall of AS causes a contraction of national output together with a rise in the level of prices causes: component costs: increase in the rise of raw materials and other components used in production processes increase costs of production eg. oil prices rising labour costs → wage increases which are greater than improvements in productivity, they often rise when unemployment is low or when ppl expect higher inflation and want a higher pay to protect their real incomes higher indirect taxes → depending on the PED and PES for their products, suppliers may choose to pass on the burden of the tax to consumers and AS will shift inwards, increasing the price level devaluation or depreciation of the national currency → increase in import prices of goods used for the production of homeland industries, increasing costs of production increase in firms’ profit margins damage to or depletion of resources → for example, a period of bad weather may reduce the fertility of land and supplies of oil may be reduced 💲 price stability 3