Cambridge IGCSE and O Level Economics

Chapter 25: The macroeconomic

aims of government
Suggested answers to individual and group activities
Group activities
1 a A
 n economic growth rate of 2.1% means that the country has produced 2.1% more output
than the year before.
b Underemployment is a situation where workers are being underused. It may that some
workers who wanted to work full-time can only get part-time jobs or that employers are not
taking full advantage of workers’ skills.
c Underemployment is likely to have been highest in agriculture. In this sector, 14% of the
country’s workers were producing only 4% of its output. The number of people working
on family farms could be reduced without any significant fall in agricultural output. Such a
reduction would enable the manufacturing and service sectors to expand.
d Mexico did appear to have the potential to grow at a faster rate than 2.1% in 2016. This was
because, although the country appeared to have near full employment, a quarter of its
workers appeared to be underemployed. If these workers were used more fully, output would
have grown more rapidly.
2 a T
 o make a more informed judgement on the question, it would be useful to know whether the
countries had any targets for economic growth, unemployment and inflation. It would also be 1
also be useful to know whether the countries experienced balance of payments stability.
 n the information provided, India and Pakistan appeared to be performing better than the
O
other three countries. They had relatively high economic growth rates and unemployment
and inflation rates that were not too high. Greece, in contrast, had nearly a quarter of its
labour force without a job. Japan benefited from low unemployment but its economic growth
rate was very low and it experienced a fall in the price level. Venezuela had an exceptionally
high inflation rate – it was out of control.
b India. Although Greece and Pakistan had higher unemployment rates, markedly so in the case of
Greece, they had a smaller labour force. This was because India had a much larger population.

Individual activities
1 a For example, issuing bank notes.
b The South African Reserve Bank had a mixed performance. It did achieve it in four out of the
eight years. In the four when it did not, it came close in two of the years, just going over the
upper limit by 0.2% point in 2010 and 0.1% point in 2012. The inflation rate averaged 5.86 (to
two decimal places) over the period. This was inside the range, although at the upper limit.

Suggested answers to multiple choice questions and

four-part question
Multiple choice questions
1 D
Price stability is a macroeconomic aim of a government. It would also want a rise in output, low
unemployment and imports equalling exports in the long run.

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Cambridge IGCSE and O Level Economics

2 D
The unemployment rate is the number of unemployed workers expressed as a percentage of the
6m
labour force. In this case it is, × 100.
50 m
3 A
An improvement in education would increase labour productivity and so the country’s
productive potential. B, C and D would all tend to reduce a country’s productive potential. B and
D would reduce the quantity of labour and C would reduce the quantity of capital.
4 B
Potential economic growth is a rise in the maximum output a country is capable of producing.

Four-part question
a Two macroeconomic aims from: economic growth, price stability (low inflation), balance of
payments stability and redistribution of income.
b Full employment is the lowest possible level of unemployment. Those people who are
willing and able to work at the going wage rate can find employment. This does not mean
zero unemployment. Some workers will always be in the process of changing jobs and some
industries will be expanding while others are declining.
c Governments want full employment as it will mean that the maximum output that can be made
with the labour force will be produced. Labour resources will not be wasted and the economy will
be producing on its production possibility curve, if other resources are being fully used.
With full employment, governments also earn high tax revenue as income, spending and profits
are likely to be high. High tax revenue can be used to improve economic performance and
increase living standards.
2
In addition, full employment reduces the amount governments have to spend to support the
unemployed. The tax revenue that might have been spent on unemployment benefits could be
used instead, for example, to improve education and healthcare.
d All governments are likely to want to achieve economic growth. This is because a higher output
has the potential to improve living standards. Success tends to breed success. A growing
economy is likely, for instance, to encourage firms to invest, which will further increase economic
growth.
All governments are also likely to want to achieve full employment and price stability. Full
employment can reduce poverty, raise tax revenue and reduce spending on unemployment
benefits. Price stability can bring a number of advantages, including making it easier for
economic agents to plan ahead and maintain or increase international price competitiveness.
Governments usually want to equate export revenue and import expenditure. If more is spent on
imports than is earned from the sale of the exports, then the country is consuming more than it
can afford. In contrast, any country that has higher export revenue than import expenditure, is
not buying all that it could afford.
Most governments do try to redistribute some income and wealth from the rich to the poor to
reduce income and wealth inequality. Achieving greater equality can be seen as fair and helps to
reduce poverty.
The extent to which governments seek to achieve these objectives and which one they give
priority to will, however, vary between countries and over time. Some countries accept a
greater degree of income and wealth inequality than others. A government whose country is
experiencing a high inflation rate is likely to have price stability as its main priority. In contrast,
the government of a country with falling output is likely to prioritise economic growth.

© Cambridge University Press 2018