Cambridge International as and a level Economics Ebook

[13]
Source: 
Cambridge International AS and A Level Economics 9708 
Paper 41 Q6 May/June 2011. 
2 a
Explain how economic growth can occur without 
the price level increasing. 
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b 
Discuss what policy measures a government 
might use to increase the country’s economic 
growth rate. 
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SUMMARY
In this chapter it has been shown that:
■ 
Governments seek to achieve a low and 
stable inflation rate, usually a balance 
on the current account of the balance of 
payments, the avoidance of destabilising 
fluctuations in its exchange rate, full 
employment and sustained and sustainable 
economic growth.
■ 
The internal value of a currency will fall if 
inflation occurs. The external value will fall if 
there is a depreciation or devaluation of the 
currency. The internal and external values 
of a currency tend to move in the same 
direction.
■ 
A high rate of inflation is likely to have an 
adverse eff ect on the balance of payments.
■ 
The Phillips curve suggests that a 
government can reduce the unemployment 
rate but at a cost of a higher inflation rate.
■ 
The expectations-augmented Phillips curve 
suggests there is no long-run trade-off
between unemployment and inflation.
■ 
Conflicts between policy objectives provide 
challenges for governments, which have to 
use a range of policy measures to achieve 
their objectives.
■ 
There is a risk because of lack of accurate 
information, time lags, unexpected 
responses, pressure groups and corruption 
but government intervention may not 
improve macroeconomic performance.
■ 
The Laff er curve suggests that tax cuts 
may actually increase a government’s 
tax revenue.