Managing the Economy

How a government steers the economy

A government wants its economy to do well, and it judges this against a few clear objectives: steady economic growth, low and stable inflation, low unemployment, and a healthy balance of trade with other countries. To check how the economy is doing it measures things like total output, rising prices and the number of people out of work. When the economy strays from its objectives, the government can act, using fiscal policy, which is its spending and taxation, and monetary policy, which works through interest rates. The catch is that these objectives often pull against each other, so managing an economy is a constant balancing act. This module covers the objectives, how the economy is measured, the policy tools, and the trade-offs between them.

Economy words

Learn these five terms before you look at how the economy is managed.

Match each economic matter to how it is measured

Fiscal against monetary policy

A government has two main sets of levers for managing the economy.

Which problem is this?

Prices across the shops are rising steadily, month after month, so a given amount of money buys less than it did. Which economic problem is this?

• Inflation
• Unemployment
• Economic growth
• A trade surplus

Every policy is a trade-off

The hardest truth in managing an economy is that the objectives often fight each other, so helping one can hurt another. If a government raises interest rates to bring down rising prices, borrowing becomes dearer, people and firms spend less, and some workers may lose their jobs. If instead it spends heavily to create jobs, demand can rise so fast that prices climb. There is rarely a move that improves everything at once. A good answer in this topic never says a policy simply works; it says what the policy is aimed at, and then names the objective it might harm in return. Weighing that trade-off is exactly the judgement the exam rewards.

Pick the true facts about managing the economy

Select every statement about managing the economy that is true.

• Economic growth is an increase in the total output of a country
• Inflation is a general rise in prices over time
• Fiscal policy uses government spending and taxation
• Lowering interest rates always ends unemployment instantly
• A government can meet every objective at once with no trade-offs

Order how a policy affects the economy

Put the steps of a government policy working through the economy in order.

• The government sets an economic objective
• It chooses a policy tool, such as changing taxes
• The policy changes how much people spend
• The change affects growth, prices or jobs
• The government reviews whether the objective was met

Complete the economy facts

A rise in the total output of a country is economic _____. A general rise in prices over time is _____. The government use of spending and taxation is _____ policy. Changing interest rates to affect the economy is _____ policy.

Driving with the accelerator and brake

Think of a government steering the economy like a driver working a car with two pedals. Press the accelerator, by spending more or making borrowing cheaper, and the economy speeds up: more is bought and made, and more people find work. Press too hard, though, and it overheats, with prices climbing faster than pay can keep up. Touch the brake, by raising taxes or making borrowing dearer, and the economy slows, which eases those climbing prices but can leave some people without work. A skilled driver never floors one pedal and forgets the other; they feel for the right speed for the road ahead. Running a whole economy is the same delicate balancing act, never a single simple lever pulled once and left alone.

Tap the government objectives

Tap every item below that is a genuine economic objective a government aims for.

• steady economic growth
• low and stable inflation
• low unemployment
• the most colourful bank notes

Work out the inflation rate

A basket of goods cost 200 pounds last year and costs 210 pounds this year. Inflation is the rise in price as a percentage of the old price. What is the inflation rate in per cent?

Advise the government

Read each situation and choose the best advice.

• Inflation is rising too fast. Which action would help to bring it down?
• Unemployment is high and the government wants to create more jobs. What could it do?
• A policy brings inflation down but pushes unemployment up. What does this show?

Build an economy point

Choose the word for each gap to complete one accurate point about managing the economy.

Explain how a government manages the economy

A friend does not understand what the government is trying to do when it manages the economy. Explain clearly the objectives and the tools it uses.

• Explain the main economic objectives a government aims for
• Explain how growth, inflation and unemployment are measured
• Explain what fiscal policy is
• Explain what monetary policy is
• Explain why managing the economy involves trade-offs