Economics A Level Year 2 – Chapter 5
CONTENT
Government macroeconomic intervention
Government macro policy aims
Inter-connectedness of problems
Effectiveness of policy options to meet all
macroeconomic objectives
, Government macro policy aims
AIMS
Economic Satisfactory Stable Exchange Low
Low Inflation
Growth BOP Rate Unemployment
1. LOW INFLATION
Governments tend to target an inflation rate of 2% as it brings the following
benefits, helping maintain international competitiveness and is considered the
best compromise between avoiding the costs of inflation and deflation.
ADVANTAGES
Price stability: Helps firms to predict future costs and accurate decisions in
the long run.
Investment: Firms will be more confident and optimistic to invest and it also
increases productive capacity, enabling higher rates of economic growth in
the future.
Real savings: Prevents savers seeing a fall in real value of savings.
Competitiveness: Causes an increase in exports as they are cheaper given
low inflation and an improvement in the current account of the BOP. Boosts
competitiveness in the long run.
, Prevent boom and bust cycles: If there is higher inflation, there can be a
boom but as it is unsustainable.
2. ECONOMIC GROWTH
In the UK, the trend of economic growth is 2.5%, governments aim to have
sustainable economic growth for the long run. In emerging markets and LEDCs,
governments may aim to first increase economic development – increasing life
expectancy, living standards and improving literacy rates – before economic
growth, which increases value of national output, income and expenditure and
higher living standards.
ADVANTAGES DISADVANTAGES
Higher average incomes: enables Current account deficit: Higher
consumers to consume more goods/ economic growth tends to increase
services and enjoy better standards consumption on imports and
of living. EG: During the twentieth therefore causes a deterioration on
century, it reduced levels of poverty the current account. The UK is
and enabled an increase in life susceptible to a current account
expectancy. deficit in high growth as UK has a
high marginal propensity to import.
Lower unemployment: firms tend to Congestion, pollution and depletion
employ more workers when there is of non-renewable resources
economic growth, hence creating
more employment.
Lower government borrowing: Inflation: If the increase in AD is more
creates higher tax revenues, and than the increase in AS there is
CONTENT
Government macroeconomic intervention
Government macro policy aims
Inter-connectedness of problems
Effectiveness of policy options to meet all
macroeconomic objectives
, Government macro policy aims
AIMS
Economic Satisfactory Stable Exchange Low
Low Inflation
Growth BOP Rate Unemployment
1. LOW INFLATION
Governments tend to target an inflation rate of 2% as it brings the following
benefits, helping maintain international competitiveness and is considered the
best compromise between avoiding the costs of inflation and deflation.
ADVANTAGES
Price stability: Helps firms to predict future costs and accurate decisions in
the long run.
Investment: Firms will be more confident and optimistic to invest and it also
increases productive capacity, enabling higher rates of economic growth in
the future.
Real savings: Prevents savers seeing a fall in real value of savings.
Competitiveness: Causes an increase in exports as they are cheaper given
low inflation and an improvement in the current account of the BOP. Boosts
competitiveness in the long run.
, Prevent boom and bust cycles: If there is higher inflation, there can be a
boom but as it is unsustainable.
2. ECONOMIC GROWTH
In the UK, the trend of economic growth is 2.5%, governments aim to have
sustainable economic growth for the long run. In emerging markets and LEDCs,
governments may aim to first increase economic development – increasing life
expectancy, living standards and improving literacy rates – before economic
growth, which increases value of national output, income and expenditure and
higher living standards.
ADVANTAGES DISADVANTAGES
Higher average incomes: enables Current account deficit: Higher
consumers to consume more goods/ economic growth tends to increase
services and enjoy better standards consumption on imports and
of living. EG: During the twentieth therefore causes a deterioration on
century, it reduced levels of poverty the current account. The UK is
and enabled an increase in life susceptible to a current account
expectancy. deficit in high growth as UK has a
high marginal propensity to import.
Lower unemployment: firms tend to Congestion, pollution and depletion
employ more workers when there is of non-renewable resources
economic growth, hence creating
more employment.
Lower government borrowing: Inflation: If the increase in AD is more
creates higher tax revenues, and than the increase in AS there is
