hey this one’s pretty long (Chapter 17 Q & A)

07/05/2013 § Leave a comment

#4. 25 marks.

a) What are the main macroeconomic objectives of government?

The four main macroeconomic objectives of a government are 1) low unemployment (or full employment), 2) low inflation rates, 3) economic growth, and 4) equity in income distribution. Firstly, unemployment is the condition of someone of working age (typically 16 – 64 years of age but this varies across counties) who is willing and able to work and actively seeking employment but unable to find a job. A nation with high levels of unemployment could suggest a low AD, which means that their economy as well as the contents of their GDP are not very strong. This means that the people who already have low income (due to a lack of a job that would otherwise provide them with a steady stream of money) would be further disincentivized to purchase goods, only pushing the AD further back. This puts a strain on the government in terms of spending on unemployment support instead of capital as well as supporting those who are in the lower percentile of total income. Secondly, low inflation rates are pretty self-explanatory. Inflation is the sustained increase in the average price level of goods and services in a nation and can be measured with the CPI (consumer price index). Governments try to keep the inflation rates low because high inflation rates mean more expensive goods. For all citizens in the nation, this is a disadvantage to them because it takes away more of their income and reduces their purchasing power. Although rising inflation rates could spur sudden spending from consumers, that’s only in the short run. In the long run, high inflation rates keep consumers from spending, which would them reduce consumption therefore lowering the nation’s AD. Thirdly, governments want economic growth to increase their GDP and strengthen their economy. Economic growth is an increase in the total output of goods and services (essentially the GDP) in a nation over time. This can be illustrated as an outward expansion in the PPC curve or the rightward shift of the AD in an AD/AS curve. Economic growth is followed by multiple consequences, one of them obviously being an economic increase in the level of income and consumption in a nation. The non-economic consequences however include negative externalities (because, naturally, as an economy grows, industries start to use more advanced technology that emit pollution and waste because that keeps costs low), inflation (due to the movement of the AD rightwards), structural unemployment (upgrades in capital and technology make for unemployed individuals lacking skills required today), a change in the composition of output, and an unequal income distribution (as the people who would benefit from economic growth are typically the minority; such as politicians, the higher educated classes, and large corporations). Finally, the fourth economic goal is equity in income distribution which can be illustrated with the Lorenz curve and explained through the Gini coefficient. Equity means economic fairness while equality means minimizing the disparities in income and wealth among a nation’s households. Equity ultimately promotes greater equality in income distribution. Generally a more equal distribution of a nation’s income among the nation’s people can avoid relative and absolute poverty as well as promote greater consumption. Governments can achieve higher levels of income distribution by using the three different taxes (proportional, regressive and progressive).

b) Assume the government chooses to pursue one of these objectives. Evaluate the possible consequences for the other objectives.

The first example that comes to mind is our very own country, Japan. Japan values the first macroeconomic goal far more than the other goals, or so they’re making it seem. When the government is presented with the opportunity to lay off some of their workers due to inefficiency and lack of productivity, they choose to keep the workers there instead of use their money on something more beneficial, like technology, education and better capital (human or physical). For example, there are many zombie companies/firms in Japan that consist of men who don’t really do anything every day for a living and still get a check at the end of each month. While they are bound to their jobs by a contract, the government still chooses to keep them there, putting their money into people who are technically unemployed (they aren’t using their skills nor are they contributing at all to the nation’s GDP). Because all this money is going into something unproductive, Japan’s GDP is the one that pays. This means that the macroeconomic goals of inflation and growth, perhaps even equity in income distribution have to pay the consequences, but mostly Japan’s economic growth. Since the government isn’t spending on human or physical capital, it’s almost impossible for the SRAS to shift rightwards and increase the output of supply in the economy. Similarly, though Japan is trying to keep almost all of its people employed, they’re failing as the people working in the zombie corporations are technically unemployed, therefore growth is also hindered since Japan can’t be pushed to it’s level of full-employment and can’t push the LRAS rightwards either. And that’s all I have for today.

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