What are the economic objectives of the government? Identify the objectives of government macro-economic policies. Understand that a combination of polices can be used to achieve an objective.

Objectives. There are four objectives and although they were never in order, they are usually now placed in the following order: 1. Price stability 2. Full employment 3. Economic Growth 4. Balancing exports and imports.

Price Stability If no PS then you will struggle to have any of the others. PS is the need to get inflation under control. At present the gov’t has set a target of 2% and that is where inflation is. What is inflation? It is the sustained rise in the price level. How is it controlled? Through interest rates – which control spending.

This is worked out with a basket of goods for Mr & Mrs Average. If January 2013 basket of goods = £100 And in January 2014 costs = £102. Inflation up 2% annually. Of course we don’t all buy the same goods so depending what you buy you may find that for you the goods have gone up/down.

Full Employment N – NON A – ACCELERATING I – INFLATION R – RATE U- UNEMPLOYMENT The government would like employment down but may want to accept a certain level of unemployment to ensure that level of inflation does not increase drastically. See Saw affect.

Full Employment At present the working population of UK (all those eligible to work, not students etc) is 32 million. There is a population of 60 million. 2.3 are unemployed.

Economic Growth Refers to growth of output in economy. Government want a richer economy at a steady rate. Avoid cyclical changes to GDP.

Balance of exports and imports What are exports or imports? Basically whoever gets the money! What we sell and what we buy. Q. Japanese tourist flying to London on a BA flight?

How to achieve these objectives/Government policies. A – Export 1. Fiscal Policy – How Govern’t raises money and spends it. 2. Monetary Policy – Controlling how much money there is in economy & interest rates. 3. Supply side policies – increasing aggregate supply in the economy.

Fiscal Policy Here the government looks at raising income from tax and then spending it, depending on the circumstances in the economy. For example if there is higher inflation in economy, then they will increase taxes to halt spending. If £1 million houses become accessible, could raise taxes as more money around. The rise in taxes would then stop people in public sector spending, but there may be a knock on affect of unemployment rising. (Its all to do with COMPROMISE). If unemployment high, so opposite and cut taxes.

Multiplier Effect This looks at the relationship between tax and spending/saving. Here one person gets a 10% tax break. So that gives them £100 more in pocket. Basis is that they would save £10 and then go into town and spend £90 in a shop. The shopkeeper can then take that £90 and spend a certain amount buying new items and saving a little. This continues and is the multiplier effect.

Marginal Propensity to Consume = From £1.00 we spend 80p- 0.8% Therefore the Marginal Propensity to Save = 0.2% Multiplier effect= 1/MPS = 1/.2 = 5 If £100 of income tax cuts is multiplied by 5, for income generated by the economy = £500.00 Also works if income tax increase.

Monetary Policy. This deals with interest rates. These are determined by Monetary Policy Committee (MPC) which sits at Bank of England. Base rate is 0.5 % This is the rate the BoE will lend to commercial banks.

Why do they lend to banks? Because banks lend. Bank has £100. They lend £90 and keep £10 for everyday withdrawals. But if bank lends too much they need to borrow from BoE to ensure liquidity.

Lending 1. Mortgage 3-4% lending rate. Personal loan rate ( car, TV, holiday) 8-9%. There is a difference because of security – less risk with house. Credit Card -20%. Here people who pay off their credit cards are paying for those who don’t. People can default. WONGA loans – 1000%. Cant go to a bank. So BoE base rate affects all the others and so the interest rate used to control spending in economy. So if mortgage rates go up/down if effects who can buy and has a knock on effect who wish to supply curtains/carpets. So interest rates can control consumer spending.

Supply Side Policies. Aimed at increasing the economy’s capacity to produce more goods and services. See diagram.