5 Government Macro I ntervention - PowerPoint Presentation

1. 5 Government Macro InterventionGovernment macro policy aimsInter-connectedness of problems

2. Government macro policy aimsinflation balance of paymentsexchange ratesunemploymenteconomic growtheconomic development.09/01/2020Mohammad Ziaul Alam, HOD,DEBS_CIDER, zia-academy.com2

3. InflationAlthough inflation is seen as inevitable, and normal, all governments are concerned to try and achieve stable prices, or at least prices which only rise at a slow rate. If prices are continually rising at high rates then investors are reluctant to invest in new machinery, factories and products because they cannot calculate the outcome of their investments. Rising inflation leads to menu costs, such as sellers having to constantly revise their price lists. Similarly those who are on fixed incomes, usually the economically inactive, such as those relying on state benefits, suffer as any increases lag well behind price rises.09/01/2020Mohammad Ziaul Alam, HOD,DEBS_CIDER, zia-academy.com3

4. Balance of paymentsThe ideal situation is for the balance of payments to be in equilibrium i.e. the inflows of money equal the outflows across the whole accountant. Countries are usually concerned about their current accounts. If there is a persistent deficit then a country could face severe economic and financial problems such as a depreciating exchange rate, inability to pay its debts and in extreme circumstances bankruptcy.Equally, a continual positive balance is problematical because it causes difficulties for trading partners especially if they are in a monetary union and cannot depreciate the exchange rate. A number of countries within the Eurozone have faced this with Germany being in credit and for example, Greece in debt.This does not mean that a country should balance its account every year with every country it trades with because a country may have a positive balance with some countries and negative balance with others. The aim should be in the long run to achieve an equilibrium level on the balance of payments.09/01/2020Mohammad Ziaul Alam, HOD,DEBS_CIDER, zia-academy.com4

5. Exchange ratesAs far as exchange rates are concerned governments wish to avoid wild fluctuations or changes. This can be achieved for floating exchange rates by managing the float or in the case of a fixed rate by constant intervention in the market to maintain the rate. While in theory Governments would like their exchange rate to remain constant this is unlikely if the country has a balance of payments disequilibrium on the current account which is not offset by inflows of capital investment, to meet a deficit, or outflows of aid or investment to other countries in the case of a surplus. In these situations a government would hope for a gradual, managed, depreciation or appreciation09/01/2020Mohammad Ziaul Alam, HOD,DEBS_CIDER, zia-academy.com5High exchange rateAdvantages •  There will be downward pressure on inflation, because imports are cheaper. •  More imports can be bought. •   It forces domestic producers to improve  their efficiency. Disadvantages •   It will damage export industries. •   It will damage domestic industries. Low exchange rateAdvantages•  There will be greater employment in export  industries. •  There wil be greater employment in domestic  industries.Disadvantages •  Inflation will occur because of higher import prices  and prices of raw materials and finished goodsAdvantages and disadvantages of high and low exchange rates

6. UnemploymentGovernments aim to achieve full employment. It is difficult to know what this means as not only are there different definitions of full employment, but there is no agreement on what percentage of unemployment would indicate that full employment had been reached. All governments, however, aim for this objective.09/01/2020Mohammad Ziaul Alam, HOD,DEBS_CIDER, zia-academy.com6

7. Economic GrowthGovernments aim to achieve sustainable economic growth. High growth rates may be very good for developing countries, but if they are achieved by depletion and exhaustion of scarce natural resource or by creating too much pollution, leading to climate change, then the high rate will not be sustainable.09/01/2020Mohammad Ziaul Alam, HOD,DEBS_CIDER, zia-academy.com7

8. Economic developmentThis is very similar to economic growth in that governments need to achieve sustainable development. Sustainable development ensures that with economic growth both the standard of living and the quality of Iife improve now and in the future. All of these should be part of the aim of development for governments.09/01/2020Mohammad Ziaul Alam, HOD,DEBS_CIDER, zia-academy.com8

9. Interconnectedness of macroeconomic problemsEconomic problems such as how to achieve low inflation and full employment do not exist in isolation, but are interconnected. Any action to try and achieve one economic aim, see above, may well result in adverse effects on other aims. In a textbook it is not possible to look at all of the links between macroeconomic objectives, but below a number of the main ones are considered.09/01/2020Mohammad Ziaul Alam, HOD,DEBS_CIDER, zia-academy.com9

10. Relationship between internal and external value of moneyThe internal value of money is how much a unit of money can buy, i.e. its internal purchasing power or the real value of money, while the external value of money is the value of a currency as measured in foreign currency. A direct comparison is with purchasing power parity.A fall in the internal value of money is a result of inflation. A country with an inflation rate higher than that of other countries will find that people lose confidence in holding its currency so its foreign exchange rate depreciates. This means that less can be bought in terms of purchasing power parity. If, however, a country has a lower rate of inflation than its main trading partners then, although the internal value of money is falling, the external value will rise. This is partly because the country's goods will appear cheaper on world markets than those of its competitors and partly because foreign holders of money would prefer to hold that country's currency.09/01/2020Mohammad Ziaul Alam, HOD,DEBS_CIDER, zia-academy.com10

11. 09/01/2020Mohammad Ziaul Alam, HOD,DEBS_CIDER, zia-academy.com11Cambridge International AS and A Level Economics by Colin Bamford and Susan Grant2. AS And A level Economics by Andrew Gillespie3. AS Economics by Terry Cook4. Economics for IBDP by Jocelyn Blink and Ian Dorton5. Principles of Economics for ISC class XII by Asis Banerjee and Debashis mazumdar