Government Economic Policy Flashcards
Study the role and the objectives of the government in an economy, and how those objectives are achieved.
What is macroeconomics?
The study of how a national economy works. It involves understanding interactions between total or aggregate demand and output and national income, employment and the general level of prices. This is a simple diagram representing a macroeconomy:
What types of organisations does the public sector include?
- national, regoinal and local government authorities and their administrative departments and offices
- government agencies responsible for the delivery of public services e.g. food standards, health, law enforcement
- public corporations
What is public expenditure?
The amount of money spent in total by government organisations, including current and capital expenditure. Public expenditure accounts for a large share of aggregate demand in many countries.
What is current expenditure?
Current expenditure is recurring spending on goods and services consumed in the current financial year, including public sector wages, transfer payments and the running costs of government offices.
What is capital expenditure?
Investments in long-assets such as computer equipment, roads, dams, schools and hospitals, and can help to expand the economy’s productive capacity.
Why do governments spend money?
- to provide goods and services that are in the public and economic interest (public and merit goods)
- to invest in national infrastructure such as road and railway networks, airports
- to support agriculture and key industries by providing subsidies, and to invest in staff training, new machinery, and the research and development (R&D) of new products
- to manage the macroeconomy, for example to boost total spending during an economic recession to help firms and reduce unemployment
- to reduce inequalities in incomes and help vulnerable people, for example by providing welfare payments to people and families in need
What are transfer payments?
Payments made by a government to individuals, usually through a social welfare programme, including unemployment benefits, disability allowances and old-age pensions.
They are ‘transfers’ because they do not involve payment for goods or services and are paid to people who are not engaged in productive activities from tax revenues paid by people and businesses that are economically active.
What is aggregate demand?
Aggregate demand is the total demand for goods and services in an economy. It includes:
- consumer expenditure
- investment expenditure
- public expenditure
- expenditure by overseas residents on exports
What is aggregate supply?
The total output or supply of all goods and services in an economy that all producers are willing and able to supply.
What four main economic objectives do most national governments have for their macroeconomies?
- a low and stable rate of inflation
- a high and stable rate of employment
- economic growth in total output (i.e. the GDP) and increased standards of living
- a stable balance of international trade and payments
What other additional objectives may a government have to improve the economic and social welfare of people in the economy?
- to reduce poverty and reduce inequalities in income and wealth
- to reduce pollution and waste, protect the natural environment and therefore encourage more sustainable economic growth
How can high inflation be bad for an economy?
- it reduces the purchasing power of people’s incomes
- it causes hardship for people on low incomes
- it increases business costs, especially if workers demand higher wages
- it makes goods and services produced in the economy less competitive than those from other countries
How can high unemployment be bad for an economy?
- it causes hardship for people who lose their jobs
- it reduces spending on goods and services and causes production to fall
- it increases public spending welfare payments to support the unemployed and their families (other public spending may be cut)
How does economic growth benefit the economy?
Growth will:
- boost firms’ revenues and profits
- boost output, incomes, jobs and living standards
- boost investments by firms in new capital and businesses
- increase tax revenues for government to finance its spending
What might happen if a country has a deficit on its balance of payments with the rest of the world?
- it may run out of foreign currency to buy imports
- the value of its currency may fall against other foreign currencies and make imports more expensive to buy (causing imported inflation)
