Cambridge International as and a level Economics Ebook

Chapter 9: The macroeconomy 
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Chapter 10:
Government macro intervention
A Level
Learning objectives
On completion of this chapter you should know:
■ 
the aims of government macroeconomic policy
■ 
the relationship between the internal and external value 
of money
■ 
the relationship between the balance of payments and 
inflation
■ 
the possible trade-off between inflation and 
unemployment
■ 
what
 
the Phillips curve and the expectations-augmented 
Phillips curve are
■ 
the problems arising from conflicts between policy objectives
■ 
the existence of government failure in macroeconomic 
policies
■ 
how the Laff er curve illustrates the possible relationship 
between tax rates and tax revenue.
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Introduction
Th
e successful achievement of government macroeconomic 
aims may be hindered by the interconnectedness of 
problems and the resulting policy confl icts For instance, 
in seeking to reduce unemployment, government policy 
measures may increase the infl ation rate. Th
e Phillips curve 
shows a possible relationship between unemployment and 
infl ation, although this relationship, in the long run, is 
challenged by the expectations-augmented Phillips curve.
Th
e existence of policy confl icts can result in 
government failure, with government intervention 
resulting in greater ineffi
ciency. An example of such 
possible government failure can be shown on the Laff er 
curve, where an increase in tax rates may actually reduce 
tax revenue.
Th
e key concepts of choice, effi
ciency, progress and 
development are important in considering what economic 
policy measures a government selects to achieve its aims 
and in assessing the relative strengths of the diff erent 
policy measures.