University of the Philippines SCHOOL OF ECONOMICS Economics 11: Markets and the State 1st Semester, AY 2021-2022 Discussion Questions for Chapters 19 and 20 Peñaredondo, Clarisse A. Econ 11 THD Instruction: Answer the following as best as you can. 1. What are the major objectives of macroeconomics? Write a brief definition of each of these objectives. Explain carefully why each objective is important. Essentially, macroeconomics is the study of the behavior and performance of the economy as a whole. It analyzes and focuses on all the aggregate indicators that influence the economy such as inflation, price levels, rate of economic growth, national income, gross domestic product (GDP), and changes in unemployment. Given that, its major objectives are the following: • High and Growing Level of National Output – Essentially, a growing economy shows an increase in economic output, which achieves the ultimate objective of economic activity – to provide goods and services that the population desires. As such, the stabilization of the growth of national production is measured by the economy’s GDP or gross domestic product without creating inflationary pressures. However, sustainable means not only an increase in real GDP but also potential GDP because when an economy is operating at its potential, there are high levels of utilization of the labor force and the capital stock. This is achieved by increasing the economy’s productive capacity through the improvement of the quality and quantity of inputs. As a result, when we increase productivity, we get more goods and services without increasing production costs, resulting in lower prices. • High Employment with Low Unemployment – achieving a high level of employment is an indicator that the economy uses its productive resources, including labor force, in the most efficient way possible. Since employment is directly related to economic output, it is a good indicator of economic conditions. High employment is one component of an economy that is operating at its full productive potential and producing at a point along its production possibilities frontier. If there is any unemployment, then the economy is not producing at its full potential so it needs an improvement in its economic efficiency. • Stable or Gently Rising Price Level – stabilizing the level of prices is important because the purchasing power of money is maintained. As such, price stability requires a low inflation rate in order to keep the growth of the rate at which prices increase at low rates. With high inflation, taxes become highly variable, the real values of people’s pensions are eroded, and people spend real resources to avoid depreciating pesos. Therefore, price stability is important because a smoothly functioning market system requires that prices accurately convey information about relative scarcities. Similarly, it is important for strengthening the national currency and for creating an atmosphere of security for citizens of the country
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