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Macroeconomic Objectives

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Hugo Flower

on 27 January 2016

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Transcript of Macroeconomic Objectives

Macroeconomic Objectives
Starter:
Beat the Teacher
Current Macroeconomic Objectives:
1. Low unemployment (Full employment)
2. Inflation at 2%
3. Equilibrium in the Balance of Payments
4. Sustainable economic growth
And:
A fair distribution of income
Protection of the environment
Structural Unemployment
Unemployment
Usually in the long term and considered the “most serious type . A loss for society as less output is created and individuals get lower incomes.
Frictional Unemployment
Shorter term and doesn’t involve a lack of skills being demanded and considered less serious than structural unemployment.
Seasonal Unemployment
Such as life guards and holiday attractions.
Real Wage Unemployment
Occurs when real wage is higher than the equilibrium real wage, which gives rise to a surplus of labor or unemployed labor.
Cyclical Unemployment
(Demand deficient unemployment) occurs during downturns of the business cycle, a recession.
Costs of Unemployment:
Lower tax revenue
More benefits spending
Social problems
Less economic activity
Debt
Loss of skills
Causes
Inflation
Demand-Pull inflation
Cost-push inflation
Excessive growth in the money supply
Cost and Consequences
Purchasing power decreases
Fall in real income
redistribution effects
Uncertainty
Menu Cost
Money illusion
International Competitiveness
Deflation
Causes
Decreases in AD
Increase in AS the “good kind”
Cost and Consequences
redistribution effects
uncertainty
menu costs
risk of deflationary spiral
risk of financial crises
The increase in total real output produced by the economy (real GDP) overtime.
Economic Growth
Since the economic growth is the increase of real output produced by the economy which the real GDP. Then the GDP must increase to have economic growth in the economy
By reducing unemployment and increasing efficiency in production you move on the ppc from point A to point B, this is an increase in the quantity of output produced, otherwise known as an increase in GDP which represents a slight econ growth. To increase further you must increase production possibilities shown by an outward shift on the ppc curve done by increasing the quantity and/or quality of one or more Factors of production or improvements in technology. The same can be said for the LRAS curve. By increasing the quantity/quality of the Factors of Production more production possibilities occur and move the LRAS curve to the right signifying an economic growth.
higher real living standards and rising employment
Fiscal Dividend
 Rising demand and output  
normally has a positive impact on company profits & business confidence
Inflation risk
Environmental concerns
Consequences of Economic Growth
Balance of Payments
What affects the balance of payments?
Why does the Government want a balance of payments in equilibrium?
Lesson Objectives:
To understand the 4 main government macroeconomic objectives
To analyse the relationship between these objectives
Plenary/homework:
The government has £35 billion set aside to devote to spending on different policy objectives. It is seeking advice on how to allocate these resources between different uses and is looking for evidence for how these resources will represent value for money - measured in this case by giving the greatest benefit to the most people in society.

You will work in two sections. Section 1 will consist of three groups each working on a different policy objective; section 2 will represent a panel of Treasury ministers who will be charged with making the final decision on the apportionment of the funds.

Reduce the budget deficit
Conflicts between macroeconomic objectives
The Phillips Curve
Unemployment vs Inflation:
As unemployment falls, workers' bargaining power rises (100 schools in London looking for just 1 economics teacher) so wages rise. This increases firms' costs of production and therefore prices - inflation
As unemployment rises, there is less spending, putting downward pressure on inflation.
Can you show this on an AD/AS graph?
Stagflation:
A period of high inflation AND high unemployment
UK in the 1970's
How could this be caused?
A recession coupled with rising import prices, eg oil.
A shift in of the Short Run AS curve
This is dangerous because a fall in real incomes (high inflation & unemployment) leads to less spending and so a drop in economic growth as well!
This can be seen as criticism of the Phillips Curve
Other conflicts:
Economic growth vs sustainability
Economic growth vs balance in current account
Economic growth vs income redistribution
Economic growth vs inflation
Inflation vs balance in the current account
Economic growth vs a balanced budget
Exercise:
Assess the likely impact of UK government labour market policies on any three
macroeconomic objectives. Refer to the information provided and to your own
knowledge. (30)
Possible labour market policies:
Improve education and training
Lower unemployment benefits
Reduce the power of trade unions
Lower income tax
Increase the minimum wage
Construct an essay plan for this past paper question
3 Analysis
3 Evaluation
Definitions
Data references
Graph?
Full transcript