Unit 5.1 - Government Macroeconomic Policy Objectives

• Macroeconomic policy objectives


  Provide a stable economic environment that is conducive to fostering strong and sustainable economic growth, on which the creation of jobs, wealth and improved living standards depend
• Macroeconomic policy objectives


  • Price stability
  • Low unemployment
  • Economic growth

  
• Inflation target


  Government sets an inflation target (2%) or a target range (e.g. 3% - 6%) for central banks to achieve
• Inflation target


  Creates accountability for banks and reduce inflationary expectations
• Price stability


  • Government will not aim for zero inflation rate
  • Any measure of inflation tends to overstate any rise in prices
  • To aim for zero inflation may lead to deflation
  • A low and stable rise caused by higher spending tends to encourage output (+/- 2%)
• Low unemployment


  • Low proportion of the labour force unemployed ⇒ higher output, high tax revenue and low expenditure on unemployment benefit
  • Government will promote labour mobility through training schemes to attempt to decrease long term unemployment
  • Government is concerned with the quality and quantity of those employed - jobs are not beneficial if they are unskilled, insecure and low-paid
• Economic growth


  • Government does not want growth that is too slow/negative, or too high
  • Falling output ⇒ Increased unemployment, decrease living standards
  • Too high ⇒ AD increasing faster than AS. Places pressure on resources and inflation (Demand-pull inflation)
  • Optimistic entrepreneurs set up firms with no long term future
  • Households expect their income to continue to increase at a high rate - encourages borrowing
  • Government considers the size of the labour force, changes in productivity and advances in technology, when determining what would be a good growth rate