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Unit2_Lecture2

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Unit2_Lecture2

Uploaded by

noelmoyo28
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© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Transcript

Unit 2: The Economy

Lecture 2: Economic Objectives and Indicators – Part A

Unit 2 The Economy. Lecture 2 Economic Objectives and Indicators – Part A

In judging the performance of an economy, certain yardsticks referred to as economic objectives


are used. Some economic objectives that are highlighted below are an acceptably high rate of
non-inflationary economic growth, a high and steady level of employment of the labor force,
quite a large percentage of the population actively employed, a stable general price level, the
avoidance of undue inflation and inflation, inflation being an increase in prices and deflation
obviously being a decrease in prices, a favorable and stable balance of payments and the
equitable distribution of income throughout the population. Now, in most market-based
economies or free market economies democratically elected government would prefer the levels
and patterns of aggregate demand and supply to be determined by market forces so they would
like as little, if no, government interference at all. However, it is recognized that market forces
alone cannot ensure that an economy will achieve the economic objectives and so state
intervention, to some degree, in all countries does occur and the ways in which government will
intervene are exerted to what is referred to as economic policy.

Now economic policy can take one of three forms. It can take the form of fiscal policy and this is
where the government is directly involved. It can be in the form of monetary policy and this is
where the Reserve Bank is involved or it could occur through direct controls. So fiscal policy
involves the use of government spending and taxation policies to influence the overall level of
economic activity. Government spending occurs through the provision of goods and services
and investments in infrastructure projects and taxation is the tax generated by the government
levied on companies and individuals. Now in order to stimulate economic growth or economic
activity, or aggregate demand, the government can either increase its government expenditure
or it can reduce taxation. Both these policies will inject additional income into the economy and
have a positive impact on aggregate demand. If on the other hand fiscal policy is tightened, that
means that taxes are increased or government expenditures decrease, this will have a negative
impact on economic activity and aggregate demand. Now taxation and government spending
which are the tools of fiscal policy are linked in the government's overall fiscal or budget
position. Now a budget position is essentially whether in the government there's a budget
surplus or a budget deficit. A budget surplus exists when the income the government receives in
the form of taxation exceeds its expenditure on the payment for goods and services and debt
interest. Obviously, a budget deficit arises when the public sector expenditure exceeds its
income or receipts. Now the budget deficit has to be financed and it can be financed through the
printing of money but it is primarily financed through borrowing. Expansionary fiscal policy is
usually associated with a budget deficit and contractionary fiscal policy is usually associated
with a budget surplus. Monetary policy regulates economic activity by influencing monetary
variables such as the rate of interest and the money supply. The influence of the rate of interest
is achieved by lowering or increasing the rate of interest and thereby encouraging or
discouraging borrowing and consumption. Obviously lower interest rates encourage
consumption and less savings and higher interest rates does the opposite. Now the money
supply is the supply of money in an economy, if that supply is increased interest rates which is
the cost of money will tend to fall and obviously the opposite is true for interest rates if the
money supply is decreased.

End of Transcript

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