ECN 004 (Online Discussion/Quiz 3—-Macroeconomic Policy Objectives, Instruments and Conflicts)—31-5-2022
Questions for Discussion
- What do you understand by Macroeconomic Policy?
- Clearly explain the objectives of Macroeconomic Policy
- What do you understand by the following concepts?
- A.Monetary Policy
- B. Fiscal Policy
- C. Supply side theory and supply-side policies
- Discuss the various instruments of Macroeconomic Policy you have learnt
- Clearly outline and discuss the various conflicts that can arise from pursuing Macroeconomic Policy Objectives and suggest how such conflicts can be resolved.
1. Macroeconomic policy is concerned with the operation of the economy as a whole. In broad terms, the goal of macroeconomic policy is to 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.
2. Sustainability – a rate of growth which allows an increase in living standards without undue structural and environmental difficulties. ‘Economic growth’ will be studied later on in this book.
Full employment – where those who are able and willing to have a job can get one, given that there will be a certain amount of frictional, seasonal and structural unemployment (referred to as the natural rate of unemployment).
Price stability – when prices remain largely stable, and there is not rapid inflation or deflation. Price stability is not necessarily the same as zero inflation, but instead steady levels of low-moderate inflation is often regarded as ideal. It is worth noting that prices of some goods and services often fall as a result of productivity improvements during periods of inflation, as inflation is only a measure of general price levels.
External Balance – equilibrium in the Balance of payments without the use of artificial constraints. That is, the value of exports being roughly equal to the value of imports over the long run.
Equitable distribution of income and wealth – a fair share of the national ‘cake’, more equitable than would be in the case of an entirely free market. Like the other economic objectives, the distribution of income is a partly subjective or normative issue
Increasing Productivity – more output per unit of labour per hour. Also, since labor is but one of many inputs to produce goods and services, it could also be described as output per unit of factor inputs per hour.
Trade Equilibrium – equilibrium in the Balance of payments without the use of artificial constraints. That is, exports roughly equal to imports over the long run.
3a. Monetary policy is the control of the quantity of money available in an economy and the channels by which new money is supplied.
b. Fiscal policy refers to the use of government spending and tax policies to influence economic conditions, especially macroeconomic conditions, including aggregate demand for goods and services, employment, inflation, and economic growth.
c. The supply-side theory is an economic concept whereby increasing the supply of goods leads to economic growth. Also defined as supply-side fiscal policy, the concept has been applied by several U.S. presidents in attempts to stimulate the economy.
4. The three standard macroeconomic policy instruments that governments use to stabilize the macro-economy are fiscal, monetary, and exchange rate policies. Yet there are debates on the efficacy of each of these instruments.
NAME: ONYENEKE SANDRA CHIZARAM
REG NO:UNN/J21/ARTS/003
COURSE CODE:004
COURSE TITLE: APPLIED ECONOMICS 11
ASSIGNMENT ON ECO
1:What do you understand by Macroeconomic Policy?
Macro economic policy is concerned with the operation of the economy as a whole.macroeconomic policy aimed at providing a stable economic environment that is conducive to fostering strong and sustainable economic growth,on which the creation of jobs, wealth and improved standard of living depends.
2:Clearly explain the objectives of Macroeconomic Policy.
A:FULL EMPLOYMENT: Performance of any government is judged in terms of goals of achieving full employment and price stability.these two may be called the key indicators of health of an economy.in other words, modern government aim at reducing both unemployment and inflation rates.
B: PRICE STABILITY:The emphasis has shifted from full employment to price stability.by price stability we must not mean an unchanging price level over tim.therefore one of the objective of macroeconomics policy is to ensure(relative) price level stability.this goal prevents not only economic fluctuations but also help in the attainment if a steady growth of an economy.
C: ECONOMIC GROWTH: Economic growth in a market economy is never steady.it experience ups and downs in their performance.one of the important benchmarks to measure the performance of an economy is the rate of increase in output over a period of time.promotion of higher economic growth is often hampered by short run fluctuations in aggregate outputs.
D: BALANCE OF PAYMENT EQUILIBRIUM AND EXCHANGE RATE STABILITY:From a macroeconomics point of view one can show that an international transaction differs from domestic transaction in term of(foreign)currency exchange.over a period of time all countries aim at balanced flow of goods services and assets into and out of the country and whenever this happen total international monetary reserves are viewed stable.we have external stability and instability however because of growing inter-connectedness and interdependence between different nations in the globalized world,the task of fulfilling this macroeconomics policy objective has become more problematic.
3:What do you understand by the following concepts?
A.Monetary Policy
B. Fiscal Policy
C. Supply side theory and supply-side policies
A: MONETARY POLICY: Monetary policy is defined as the control of the quantity of money available in an economy and channels by which new money is supplied.by managing the money supply,a central bank aims to influence macroeconomics factor including inflation,the rate of consumption, economic growth and overall liquidity.
B: FISCAL POLICY: Fiscal policy is defined as the use of government spending and tax policies to influence economic cond, especially macroeconomics conditions including aggregate demand for goods and services, employment, inflation and economic growth.this theory was developed on response to the GREAT DEPRESSION,which defied classical economics assumptions that economic swings were self-correcting.keynes believed that government could stabilize the business cycle and regulate economic output by adjusting spending and tax policies to make up for the shortfalls of the private sector.
C:SUPPLY-SIDE THEORY AND SUPPLY-SIDE POLICIES: Supply & side theory is also known as “REAGANOMICS POLICY” espoused by 40th USA president Ronald Reagan.this theory popularized the controversial idea that greater tax cuts for wealthy investors and enterpreneur provide them with the incentives to save and invest and produce economic benefits that trickle down into the overall economy.The supply-side theory is typically held in stark contrast to the Keynesian theory which among other facets includes the idea that demand can falter so if lagging consumer demand drags the economy into recession,the government should intervene wit fiscal and monetary stimuli.
SUPPLY-SIDE POLICY: Supply-side policies are mainly macroeconomics policies aimed at making market and industries operates more efficiently and contribute to a faster underlying-rate of growth of real national output.
4:Discuss the various instruments of Macroeconomic Policy you have learnt.
A: MONETARY POLICY INSTRUMENT:These are used for managing short term rates(federal funds rates) and changing reserve requirement for commercial banks.monetary policy instrument is used to manage or curb domestic inflation.
B: FISCAL POLICY INSTRUMENT:These instrument consists in managing the national budget and it’s financing so as to influence economic activity.this entails the expansion or contraction of government programs such as building road, military expenditure and social welfare programs.
C: EXCHANGE RATE POLICY:This is the rate or manner in which a country manages it’s currency in respect to foreign currencies and foreign exchange market.
5:Clearly outline and discuss the various conflicts that can arise from pursuing Macroeconomic Policy Objectives and suggest how such conflicts can be resolved.
A:LOW INFLATION: Reducing the rate of inflation can be achieved by reducing aggregate demand,but it is likely to conflict with keep unemployment economic growth.reducing aggregate demand push the economy into recession.
B: INCREASING GROWTH:If the growth rate is too low ut can be raised in short term by increasing aggregate demand,but this may led to higher inflation and a worsening balance of payment as higher spending sucks in more import.long term growth may be improved through the Supply-side measure but this carries the risks of increasing inequality.
C: REDUCING UNEMPLOYMENT: Cyclical unemployment can be reduce by increasing aggregate demand but again this carries the risks of higher inflation and worsening balance of payment.other kinds of unemployment such as frictional,seasonal and structural may be addressed through supply-side policy,but again this carry the risk of inequality.
D: IMPROVING OF GOVERNMENT FINANCES:If the budget defies or the national debt are considered to be too high,the government can raise taxes or reduce public spending.this will reduce the aggregate demand,resulting to a lower equilibrium output.so unemployment may rise and growth will fall.
RESOLUTION OF CONFLICT
Communication
Negotiation
GIGINNA GODSWILL CHUKWUEMERIE
UNN/J21/MGTSC/011
1.) Macroeconomic policy is concerned with the operation of the economy as a whole.
2.) The objectives of macroeconomic policy is to 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.
3.) A. Monetary policy is the control of the quantity of money available in an economy and the channels by which new money is supplied.
B. Fiscal policy is the use of government spending and taxation to influence the economy.
C. The supply-side theory is an economic concept whereby increasing the supply of goods leads to economic growth.
4a.) Non-Inflationary Growth
In other words, this is stable and sustainable economic growth and development that is “real” (non-inflationary) over the long-term. Economic growth in an economy is an outward shift in its Production Possibility Curve (PPC). Another way to define growth is the increase in a country’s total output or Gross Domestic Product (GDP). The objective of the central bank and government would be an increase in economic growth without a rise in the rate of inflation.
b.) Low Inflation
Inflation is the sustained increase in the price level. The rate of inflation is the change in inflation over a period. Central banks would like to keep the growth of the rate at which prices increase at low rates. As inflation rises, every dollar you own buys a smaller percentage of a good or service. For example, the U.S. Federal Reserve targets the inflation rate at roughly 2%.
c.) Low Unemployment or Full Employment
Full employment occurs when the labor force (this counts as people who are actively seeking jobs or are already employed) is fully employed in productive work. A person is considered to be unemployed if he doesn’t currently doesn’t have a job and is actively searching for one. Having a lower rate of unemployment means that the economy is more productive. This objective means that as many people who want to be employed are employed, so the economy is running at or near full productivity.
d.) Equilibrium in Balance of Payments
Equilibrium in Balance of Payments means that a country’s exports or imports should not be much larger than its imports or exports. Having a large balance of payments deficit or surplus is not beneficial for the economy.
e.) Fair Distribution of Income
A fair or equitable distribution of income means that the gap between the rich and the poor is not too large. Fair or equitable doesn’t mean equal, but fair is a relative concept. What could be fair to one person, may not be fair to another. The government doesn’t want all the wealth concentrated with a small group of people.
5a.) Economic growth vs inflation
One macro-economic conflict can come between economic growth and inflation (which leads to a similar conflict between unemployment and inflation). If there is rapid economic growth, it is more likely that inflationary pressures will increase. Inflation is particularly likely to occur when growth is above the long run trend rate, and AD increases faster than AS.
When the economy is growing very quickly, firms have difficulty employing sufficient skilled labour; this can lead to wage inflation and higher wages cause higher prices. Also, if demand grows faster than supply, firms will respond to shortages by putting up prices.
Inflationary growth

In this diagram, there is an increase in AD, when the economy is close to full capacity. We get an increase in real GDP but also an increase in the inflation rate.
Example of conflict between economic growth and inflation
In the late 1980s during the Lawson boom, the UK experienced a high rate of economic growth (4-5% a year). This growth rate was above the long run trend rate of growth but caused inflationary pressures to increase. Also if growth is very quick, there may be supply constraints pushing up commodity price increases. This economic boom of the 1980s proved unsustainable and ultimately led to the recession in 1991 (as the government increased interest rates to try and control inflation.

The rapid economic growth of 1986-1989 led to inflation increasing to nearly 1%. It required interest rates of 12% and the recession of 1991/92 to bring inflation under control.
Low inflationary growth
However, it is possible to have economic growth without causing inflation. If growth is sustainable – if it is close to the long run trend rate, then LRAS will increase at the same rate as AD, and therefore, we will not see inflation.

Economic growth without inflation. AD and LRAS increasing at the same rate.
The UK between 1993-2007, had a long period of economic expansion. But, this prolonged economic growth did not cause inflation. This is sometimes known as the great moderation.

The UK great moderation from 1992 to 2008 – low inflation, positive economic growth.
b. Economic growth vs balance of payments
When economic growth is led by consumer spending, it tends to cause a deficit in the current account. This is because as consumer spending rises, there will be a rise in import spending. This is especially true in the UK, where traditionally we have a high marginal propensity to import (MPM). Also, high economic growth may increase inflation and make exports less competitive.

The late 1980s saw an economic boom and a growing current account deficit. The recession of 1992, saw a fall in import spending and a decline in the current account deficit.
However, if economic growth is export-led, then there can be an increase in economic growth without causing a current account deficit. For example, Germany has seen strong economic growth, but it often runs a current account surplus.
c. Economic growth vs budget deficit
A government may feel it needs to reduce the budget deficit. This will require higher taxes and lower spending. However, this tightening of fiscal policy will lead to a fall in AD and lead to lower economic growth.
Similarly, if the government wants to boost the rate of economic growth it could pursue expansionary fiscal policy (tax cuts/spending rises). This should increase aggregate demand and help economic growth – but there will be a side effect, the budget deficit will rise.
Evaluation
If policies to reduce a budget deficit lead to unemployment and lower growth, the government will need to pay more on benefits and will get lower tax receipts. Therefore the deficit may experience only a small reduction. This has been a dilemma for European governments since the austerity measures of post-2010.
However, it depends on how you reduce a budget deficit. For example, if you raised the retirement age and made it more difficult to get welfare benefits, then you can reduce government spending, but there is little negative impact on economic growth (in fact, people have to work longer, increasing LRAS). Though there may be side effects on issues of equality and fairness.
d. Economic growth vs environment
There can be a strong conflict between economic growth and environmental objectives. Higher GDP leads to higher levels of pollution and consumption of non-renewable resources.
However, it is possible to have economic growth without harming the environment. For example, the development of solar panels has helped increase energy productivity, but it is also better for the environment than burning coal.
e. Conflict between unemployment and inflation
There is often a trade off (at least in the short run) between unemployment and inflation. In a period of high growth – jobs are created, causing unemployment to fall. But, as unemployment falls, it can put upward pressure on wages, leading to inflation.

The Phillips curve suggests there is a trade off between these two objectives. For example, a cut in interest rates leads to higher Aggregate Demand (AD). Higher AD leads to higher growth (Lower unemployment) but also higher inflation. Therefore the Phillips curve trade-off moves from A to B.
But, it is possible to reduce both inflation and unemployment. If successful supply-side policies are used, you can reduce structural unemployment without causing wage inflation. Also, if the growth is sustainable, inflation will remain low.
1) Macroeconomic policy is concerned with the operation of the economy as a whole. In broad terms, the goal of macroeconomic policy is to 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.
2) Broadly, the objective of macroeconomic policies is to maximize the level of national income, providing economic growth to raise the utility and standard of living of participants in the economy. There are also a number of secondary objective which are held to lead to the maximization of income over the long run.
3a) Monetary policy: This is the control of the of money available in an economy and the channels by which new money is supplied. By managing the money supply, a central bank aims to influence macroeconomic factors including inflation, the rate of consumption, economic growth, and overall liquidity.
3b) Fiscal policy: It operates through changes in the level and composition of government spending, the level and types of taxes levied and the level form of government borrowing. Government can directly influence economic activity through recurrent and Capital expenditure, and indirectly, through the effects of spending, takes and transfer on private consumption, investment and net exports.
3c) Supply-side theory and Supply-side policies: supply-side theory is an economic theory built on the concepts that increasing the supply of goods leads to economic growth.whereas, supply-side fiscal policy, the concepts has been used by several U.S president in fiscal policy stimulus.
4i) Fiscal policy: It operates through changes in the level and composition of government spending, the level and types of taxes levied and the level form of government borrowing. Government can directly influence economic activity through recurrent and Capital expenditure, and indirectly, through the effects of spending, takes and transfer on private consumption, investment and net exports.
4ii) Monetary policy: Instruments are used for managing short-term rates ( the federal funds rate and discount rates in the U.S ), and changing reserve requirements for commercial banks. Monetary policy can be either expensive for the economy (short-term rates low relative to the inflation rate).
4iii) Supply-side theory: This is an economic concept whereby increasing the supply of goods leads to economic growth. Comprehensively, supply- side approaches target variables that bolster an economy’s ability to supply more goods and services.
4iv) Supply- side policies: This are policies that aim to Increase productivity and efficiency in the economy. The objectives of supply-side policies is to boost aggregate supply (AS) to results in increased output. In this case, the LRAS shifts to the right and national output levels increase, meanwhile the price level decreases.
5a) Conflicts that can arise from pursuing macroeconomic policy objectives
I) Economic growth vs inflation
Ii) Economic growth vs balance of payments
III) Economic growth vs budget deficits
Iv) Economic growth vs environment
I) Economic growth vs inflation: One macro-economic conflict can come between economic growth and inflation (which leads to a similar conflict between unemployment and inflation). If there is rapid economic growth, it is more likely that inflationary pressures will increase.
Ii) Economic growth vs balance of payments: This is when economic growth is led by consumer spending, it tends to cause a deficit in the current account. This is because as consumer spending rises, there will be a rise in import spending.
III) Economic growth vs budget deficits: A government may feel it needs to reduce the budget deficits. This will require higher taxes and lower spending. However, this tightening of fiscal policy will lead to a fall in AD and lead to lower economic growth.
Iv) Economic growth vs environment: There can be a strong conflict between economic growth and environmental objectives. Higher GDP leads to higher levels of population and consumption of non – renewable resources.
5b) how conflicts can be resolved
I) Low inflation
Ii) Increasing growth
III) Reducing unemployment
Iv) Improving the environment
I) Low inflation: Reducing the rate of inflation can be achieved by reducing AD, but this is likely to conflict with keeping unemployment at a low level and maintaining economic growth.
Ii) Increasing growth: If the growth rate is too low ( perhaps below trend), it can be raised in the short term by increasing AD.
III) Reducing unemployment: Cyclical unemployment can be reduced by increasing AD, but again, thus carries the risk of higher inflation and a worsening balance of payments.
Iv) Improving the environment: Measures to improve or protect the environment may involve a trade -off with economic growth, at least in the short to medium term.
1. Macroeconomics policy is a government plan and action to influence the economy as a whole .
2i. Healthy and sustainable economic growth
ii. Low and stable inflation rate
iii. Equilibrium in the balance of payment
iv. Full employment
3i. The monetary policy focuses on the money supply. The key tools of monetary policy
include policy rates, reserve requirements, and open market operations.
ii. The fiscal policy uses budget instruments. Governments can change taxes and their spending to influence the economy.
iii. The supply-side policy seeks to improve the competitiveness and efficiency of the free market. To do this, the government introduces privatization, deregulation, and antitrust policies.
*supply-side economics, Theory that focuses on influencing the supply of labour and goods, using tax cuts and benefit cuts as incentives to work and produce goods.
4. Macroeconomic policy instruments are macroeconomic quantities that can be directly controlled by an economic policy maker.[1][2] Instruments can be divided into two subsets: a) monetary policy instruments and b) fiscal policy instruments. Monetary policy is conducted by the central bank of a country (such as the Federal Reserve in the U.S.) or of a supranational region (such as the Euro zone). Fiscal policy is conducted by the executive and legislative branches of the government and deals with managing a nation’s budget.
5i. Economic growth vs inflation: One macro-economic conflict can come between economic growth and inflation (which leads to a similar conflict between unemployment and inflation)
ii. Economic growth vs balance of payments:
When economic growth is led by consumer spending, it tends to cause a deficit in the current account. This is because as consumer spending rises, there will be a rise in import spending.
iii. Economic growth vs budget deficit:
A government may feel it needs to reduce the budget deficit. This will require higher taxes and lower spending. However, this tightening of fiscal policy will lead to a fall in AD and lead to lower economic growth.
Ozoemena Favour
1.Monetary policy looks at the whole,its objectives are aggregate in character.Macroeconomic goals are quite different because the overall response of the economy must not match with individuals units.It focuses on economic policy like full employment, price stability, economic growth, Balance of payment equilibrium amd social objectives.
2.The objectives of macroeconomic policy are:
i.Full employment:The performance of any government is judged in terms of achieving full employment.In other words,modern governments aims at reducing both unemployment and inflation rates.Unemployment is the involuntary idleness of mainly labour force and other productive resources.Unemployment is closely related to the economy’s aggregate output.The higher the unemployment rate, the greater the divergence between actual aggregate output and potential output. So one of the objectives of macroeconomics is full employment.However Keynes believes that the goal of full employment may be desirable but unable to achieve cause we can’t have an economy with total full employment.Full employment doesn’t mean no one is unemployed,even if 4 to 5 percent are unemployed it is still considered full employment.
ii.Price stability:Another macroeconomic policy objective is price stability.By price stability we must not mean an unchanging price level over time,not necessarily price increase is unwelcome particularly if it is restricted within a reasonable limit.However,it is difficult again to define the permssible or reasonable rate of inflation.But sustained increase in price level as well as a falling price level produce destabilising effects on the economy.Therefore one of the objectives of macroeconomic policy is to ensure stability of price.
iii.Economic growth:Economic growth in a market economy is never steady.One of the important benchmarks to measure the performance of an economy is the rate of increase in output over a period of time.There are three main sources of econonic growth which are;a.the growth of labour force b.capital formation c.technological progress.
However promotion of higher economic growth is often hampered by short run flunctuations in aggregate output.in view of this, it is said that macroeconomic policy should promote economic growth with reasonable price stability.
iv.Balance of payment equilibrium and exchange rate stability:From a macroeconomic point of view one can show that an international transaction differs from domestic transactions in term of (foreign) currency exchange.Over time all countries aim at balanced flow of goods, services and assets into and out of the country.
If a country’s export exceed imports,it experiences a balance of payment surplus, when the country loses reserves it experiences balance of payments deficit i.e imports exceed exports.The foreign exchange rate should be stable in price and vice versa.
v.Social objectives:The list of objectives that we have referred here is by no means an exhautive one; one can add more in the list.Even then we have incorporated the major ones.Macroeconomic policy is also used to attain social ends or social welfare.This means that income distribution needs be more fair and equitable.
3.A.MONETARY POLICY: Monetary policy attempts to stabilize aggregate demand in the economy by influencing the availability or price of money i.e rate of interest in the economy.Monetary policy is defined as a policy employing the central banks control of the supply of money as an instrument for achieving the macroeconomic goals.Monetary policy is the government or central bank process of managing markets economy.It involves operations with money,interests,loans etc.Monetary policy also consists of the process of drafting,announcing and implementing the plan of actions taken by the central bank,currency board or other component.
B.FISCAL POLICY:Fiscal policy is largely based on the ideas of British economist John Maynard Keynes(1883-1946),who argued that economic recessions are due to a deficiency in the consumption spending and business investement component of aggregate demand.His theories were developed in response to the Great depression which defile Classical economics assumption that economic swings were self correcting.According to Keynesian government, taxation and spending can be managed rationally and used to counteract the excesses and deficiencies of private sector consumption and investment spending in order to stabilize the economy.
C.SUPPLY SIDE THEORY AND SUPPLY SIDE POLICIES:Supply side theory is an economic theory built on the concept that increasing the supply of goods leads to economic growth.Also defined as supply-side fiscal policy,the concept has been used by several US Presidents in fiscal policy stimulus. Supply side approaches seek to target variables that boister an economy’s ability to supply more goods.Supply side fiscal policy can be based on any number of variables.It is not limited in scope but rather seeks to identify variables that will lead to increased supply and subsequently economic growth.
4.Macroeconomic policy instruments are:
i.Monetary policy:Monetary policy attempts to stabilize aggregate demand in the economy by influencing the availability or price of money i.e rate of interest in the economy.Monetary policy is defined as a policy employing the central banks control of the supply of money as an instrument for achieving the macroeconomic goals.Monetary policy also consists of the process of drafting,announcing and implementing the plan of actions taken by the central bank,currency board or other component.Monetary policy consists of management of money supply and interest rates aimed at achieving macroeconomic objectives such as controlling inflation, consumption, growth and liquidity.
B.FISCAL POLICY:Fiscal policy is largely based on the ideas of British economist John Maynard Keynes(1883-1946),who argued that economic recessions are due to a deficiency in the consumption spending and business investment component of aggregate demand.Hos theories were developed in response to the Great Depression which defile Classical Economics assumption that economic swings were self-correcting.According to keynesian government,taxation and spending can be managed rationally and used to counteract the excesses and deficiencies of private sector consumption and investment spending in order to stabilize the economy.
C.SUPPLY SIDE THEORY AND SUPPLY SIDE POLICIES:Supply side theory is an economic theory built on the concept that increasing the supply of goods leads to economic growth. Also defined as supply-side fiscal policy,the concept has been used by several US Presidents in fiscal policy stimulus. Supply side approaches seek to target variables that boister an economy’s ability to supply more goods.In general,supply side fiscal policy can be based on any number of variables.It is not limited in scope but rather seeks to identify variables that will lead to increased supply and subsequently economic growth.
5.Conflicts between objectives:
A.Inflation and unemployment:Consider this scenario,you are running a restaurant and the head chef is asking you for a wage increase.He may be good at his job,but you are not keen to pay more for the same service because it will eat into profits.What do you do?if there were selection of unemployed chefs eager and willing to take up the post, you would probably look to employ a replacement,at the same or possibly rate than your current chef.If however chef are in short supply and the sicess of your restuarant relies on having a good head chef that you can rely on, you would likely to enter into dialogue with him to keep him onboard.
In other words, a shortage of labour in a specific field can cause wage pressures to build up.The net effect is wider economy is that as wages go up people start spending more the cost of production increase as labour is a major production cost and inflation begins to rise.
B.Economic growth and the balance of payment on the current account:As an economy grows and income rise, consumers are likely to demand more imports and firms incentives to export will diminish as it easier to find eager customs in the domestic market. Therefore,economic growth is likely to worsen the current account.The main exception to this is export-led growth, where the driver of growth is an increase in thre net export component of the balance of payments.Export led growth means that the BOP will improve as more goods and services are sold abroad.
Name: Soni – Onovo Precious Chinwem
Reg no: UNN/J21/SOCS/031
Email address: sonionovoprecious@gmail.com
1) Macro economic policy may simply be defined as a set of government of rules and regulations to control or Stimulates the aggregates indicators of an economy frames the macro economic policy, aggregates indicators involve national income, money, supply, inflation, unemployment rate, growth rate, interest rate and many more .in short policies framed to meet the macro goals.
2) a) Trade equilibrium: equilibrium in the balance of payment without use of artificial constraints. That is exports roughly equal to imports over the long run.
b) External balance : Equilibrium in the balance of parent without use of artificial constraints is exports roughly equal to the value imports over the long run.
c) Sustainability: A rate of growth which allows an increase in living standards without undue Structural and environmental difficulties.
d) Full Employment: Where those who are able and willing to have a job can get one, given that there will be a certain amount of frictional ,seasonal and Structural unemployment (referred to as the natural rate of unemployment).
3)(a) Monetary Policy: is the control of the quantity of money available in an economy and the channels by which new money is supplied.
b) Fiscal Policy : may be defined as the use of income and expenditure instruments or policies to control or regulate the economic activities in a country.
c) Supply Side Theory : The supply side theory is an economic concepts whereby increasing the supply of goods leads to economic growth.
d) Supply Side Policies: are policies that aim to increase productive and efficiency in the economy.
4 ) (a) Monetary policy decisions are implemented by changing the cash rate (the interest rate overnight loans in the money market).
b) Fiscal Policy: operates through changes in the level and composition of government spending, the level and types of taxes levied and the level and form of government borrowing.
c) Exchange Rate Policy: is concerned with how the value of the domestic currency, relative to other currencies is determined.
5) a) Low inflation
b)Exchange rate stability
c) Economic growth
d) Low government borrowing /public sector debt.
How such conflict can be resolved;
i) Economic growth vs Inflation: One macro economic conflict can come between economic growth and inflation (which leads to similar conflict between unemployment and inflation ) . if there is rapid economic growth , it is more likely that inflationary pressure will increase.
ii) Economic growth vs balance of payment : when economic growth is led by consumers spending, tends to cause a deficit in the current account ,this because as consumer spending rises ,there will be rise in import spending.
iii) Economic Growth vs Budget Deficit: A government may feel it needs to reduce budget deficit. This request higher taxes and lower spending.
1: macroeconomic policy is a government plan and action in influence the economic as a whole.
2: macroeconomic policy is concerned with the operation of the economy as a whole. In broad terms, the goal of macroeconomic environment that is conducive to fostering strong and sustainable economic growth,on which the creation of jobs, weather and improved living standards depend.
3 a : Monetary policy is a set of actions available to a nation’s central bank of achieve sustainable economic growth by adjusting the money supply.
b: Fiscal policy is the means by which a government adjusts it’s spending levels and tax rate to monitor and influence a nation’s economy.
c: Supply side theory and supply side policies: The supply side theory holds that economic growth is stimulated through fiscal policies designed to increase the supply of goods and services.
4: Performance of any government is judged in terms of goals of achieving full employment and price stability.
5: However, promotion of higher economic growth is often hampered by short run fluctuations in aggregate output.
Macroeconomics policy is the actions,aims and objective to formulate or achieve equity and efficiency at the macro level.Macroeconomics also aims to maximize the level of national income and the standard of living.
2a.Economic growth: Economic growth is an increase in the production of economic goods and services compared from one period to another.
This calculate the level of income and how to spend in the economy (GDP)
2b.Full employment:it is an economic situation in which all available labour resources are being used in the most efficiency way possible.
2c.Balance of payment: it is the method country use to monitor all international monetry transaction at a specific period of time
3a.Monetary policy: Monetary policy attempt to stabilize aggregate demand in the economy by influencing the availability of price of money i.e the rate of interest in an economy.
these macroeconomics policy regulate and influence employment and inflation. The central bank is responsible for formulating these policies.
there are two types of Monetary policy,they are ;
A.Expansionary monetary policy
B.Contractionary monetary policy
3b.Fiscal policy :it refers to the use of government spending and tax policy to influence economic condition such as aggregate demand for good and services, employment, inflation and economic growth.
fiscal policy is largely based on the idea from John Maynard Keynes who argue government could stabilize the business cycle and regulate economic output.
3c.Exchange rate policy:This policy emphasize on the manner in which a country manages it’s currencies in respect to foreign currency and foreign exchange market .In some situation whereby the is not balance the economy of a country experience deficit or surplus in the exchange rate.
3d.Supply side policy: Supply side theory is an economic theory built on the concept that increasing the Supply of goods leads to economy growth.
These approach and policy of macroeconomics emphasize on variable that bolster an economy ability to supply more good.
4a.By buying and selling short term bond
4b.Change of interest rate
5. Economic growth vs inflation
One macro-economic conflict can come between economic growth and inflation (which leads to a similar conflict between unemployment and inflation). If there is rapid economic growth, it is more likely that inflationary pressures will increase. Inflation is particularly likely to occur when growth is above the long run trend rate, and AD increases faster than AS.
When the economy is growing very quickly, firms have difficulty employing sufficient skilled labour; this can lead to wage inflation and higher wages cause higher prices. Also, if demand grows faster than supply, firms will respond to shortages by putting up prices.
5b.. Economic growth vs balance of payments
When economic growth is led by consumer spending, it tends to cause a deficit in the current account. This is because as consumer spending rises, there will be a rise in import spending. This is especially true in the UK, where traditionally we have a high marginal propensity to import (MPM). Also, high economic growth may increase inflation and make exports less competitive.

The late 1980s saw an economic boom and a growing current account deficit. The recession of 1992, saw a fall in import spending and a decline in the current account deficit.
However, if economic growth is export-led, then there can be an increase in economic growth without causing a current account deficit. For example, Germany has seen strong economic growth, but it often runs a current account surplus.
See more – Is there a conflict between economic growth and the balance of payments?
3. Economic growth vs budget deficit
A government may feel it needs to reduce the budget deficit. This will require higher taxes and lower spending. However, this tightening of fiscal policy will lead to a fall in AD and lead to lower economic growth.
Similarly, if the government wants to boost the rate of economic growth it could pursue expansionary fiscal policy (tax cuts/spending rises). This should increase aggregate demand and help economic growth – but there will be a side effect, the budget deficit will rise.
Evaluation
If policies to reduce a budget deficit lead to unemployment and lower growth, the government will need to pay more on benefits and will get lower tax receipts. Therefore the deficit may experience only a small reduction. This has been a dilemma for European governments since the austerity measures of post-2010.
However, it depends on how you reduce a budget deficit. For example, if you raised the retirement age and made it more difficult to get welfare benefits, then you can reduce government spending, but there is little negative impact on economic growth (in fact, people have to work longer, increasing LRAS). Though there may be side effects on issues of equality and fairness.
4. Economic growth vs environment
There can be a strong conflict between economic growth and environmental objectives. Higher GDP leads to higher levels of pollution and consumption of non-renewable resources.
However, it is possible to have economic growth without harming the environment. For example, the development of solar panels has helped increase energy productivity, but it is also better for the environment than burning coal.
5. Conflict between unemployment and inflation
There is often a trade off (at least in the short run) between unemployment and inflation. In a period of high growth – jobs are created, causing unemployment to fall. But, as unemployment falls, it can put upward pressure on wages, leading to inflation.

The Phillips curve suggests there is a trade off between these two objectives. For example, a cut in interest rates leads to higher Aggregate Demand (AD). Higher AD leads to higher growth (Lower unemployment) but also higher inflation. Therefore the Phillips curve trade-off moves from A to B.
But, it is possible to reduce both annemployment. If sessful supply-side policies are used, you can reduce structural unemployment without causing wage inflation. Also, if the growth is sustainable, inflation remains.
1: Macroeconomic policy is concerned with the operation of the economy as a whole. In broad terms, the goal of macroeconomic policy is to 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.
2: The objective of macroeconomic policies is to maximize the level of national income, providing economic growth to raise the utility and standard of living of participants in the economy.
1 Sustainability – a rate of growth which allows an increase in living standards without undue structural and environmental difficulties. ‘Economic growth’ will be studied later on in this book.
1. Full employment – where those who are able and willing to have a job can get one, given that there will be a certain amount of frictional, seasonal and structural unemployment (referred to as the natural rate of unemployment).
2. Price stability – when prices remain largely stable, and there is not rapid inflation or deflation. Price stability is not necessarily the same as zero inflation, but instead steady levels of low-moderate inflation is often regarded as ideal.
3. Monetary policy is a set of tools that a nation’s central bank has available to promote sustainable economic growth by controlling the overall supply of money that is available to the nation’s banks, its consumers, and its businesses
B Fiscal policy refers to the use of government spending and tax policies to influence economic conditions, especially macroeconomic conditions, including aggregate demand for goods and services, employment, inflation, and economic growth.
C The supply-side theory is an economic concept whereby increasing the supply of goods leads to economic growth.
4 Monetary policy
Fiscal policy
5 (i) Inflation and unemployment
(II) Economic growth and balance of payment on the current account.
(iii) Economic growth and income redistribution
(iv) increased employment and sustainable probability
UNN/J21/SOCS/019
Mokelu Matthew obiajulu
Name: Soni- Onovo precious Chinwem
Reg no: UNN/J21/SOCS/031
Email address : sonionovoprecious@gmail.com
1) Macro economics policy may simply be defined as a set o government rules and regulations to control or stimulates the aggregates indicators of an economy frames the macro economic policy . Aggregates indicators involve national income , money ,supply inflation , unemployment, growth rate, interest rate and many more .in short policies framed to meet macro goals
2) a). Trade equilibrium -equilibrium in the balance of payment without the use of artificial constraints that is exports roughly e quality import over the long run
b) external balance equilibrium in the balance of payment without use artificial constraints that exports roughly equal to the value of imports over the long run.
c) Sustainability – A rate of growth which allows an increase in living standards without undies. Structural and environmental difficulties
d) full employment -where those who are able and wiling to have a job can get one, given that there will be a certain amount of frictional seasonal and structure unemployment (referred to as the natural rate of unemployment).
3) a) Monetary policy is the control of the quantity of money available in an economy and the channels by which new money is supplied.
b) fiscal policy – may be defined as the use of income and expenditure instruments or policies 5o control or regulates the economic activities in a country.
c)supply side theory – is an 3comic concept where by increasing the supply of goods leads to economic growth.
d) Supply side polices -. Supply side policies are aim to increase productivity and efficiency in the economy.
4)a) fiscal policy – operates through changes in the level and composition of government spending , the level and types of taxes levied and level and of form of government borrowing. Government can directly influence economic activities through recurrent and capital expenditure, and indirectly through the effect of spending ,taxes and transfer on private consumption , investment and net exports.
b) monetary policy – monetary policy decision are implemented by changing the cash rate is determined in money market by the forces of supply and demand for overnight funds.
C) Exchange rate policy -is concerned how the value of domestic currency is relative to other currencies is determined.
5 ) a) Economic growth positive and sustainable growth .
b) Current account – balance of payment( avoid unsustainable current account deficit )
C) Exchange rate stability
d)low government borrowing / public sectors debts
How the conflict can be resolved
1) Economic growth vs inflation – one macro economic conflict can come between economic growth and inflation ( which leads to similar conflict between unemployment and inflation) if there is rapid economic growth , it is more likely that inflationary pressure will increase . inflation is likely to occur when growth is above the long run tends rate and AD increases faster than AS.
2)Economic growth vs balance of payment – when economic growth is led by economic spending , it tends to cause a deficit in the current account. This because a consumer spending arises there will be rose in import spending.
3) Economic growth vs budget deficit – A government may feel it needs to reduce the budget deficit this will require hover taxes and lower spending.
1: What do you understand by Macroeconomic Policy?
Ans: The term macroeconomic policy relates to the policy concerned with the operation of the economy as a whole that focuses on achieving certain macroeconomic goals and uses policy instruments to achieve those objectives.
2: Clearly explain the objectives of Macroeconomic Policy
Ans:
I: Full employment:
Performance of any government is judged in terms of goals of achieving full employment and price stability. These two may be called the key indicators of health of an economy. In other words, modern governments aim at reducing both unemployment and inflation rates.
II: Price stability:
No longer the attainment of full employment is considered as a macroeconomic goal. The emphasis has shifted to price stability. By price stability we must not mean an unchanging price level over time. Not necessarily, price increase is unwelcome, particularly if it is restricted within a reasonable limit.
III: Economic growth:
Economic growth in a market economy is never steady. These economies experience ups and downs in their performance. This objective became uppermost in the period following the World War II (1939-45). Economists call such ups and downs in the economic performance as trade cycle/business cycle.
IV: Balance of payments equilibrium and exchange rate stability:
From a macro- economic point of view, one can show that an international transaction differs from domestic transaction in terms of (foreign) currency exchange. Over a period of time, all countries aim at balanced flow of goods, services and assets into and out of the country.
V: Social objectives:The list of objectives that we have referred here is by no means an exhaustive one; one can add more in the list. Even then we have incorporated the major ones.
3: What do you understand by the following concepts?
A.Monetary Policy
B. Fiscal Policy
C. Supply side theory and supply-side policies
A: Monetary policy is an economic policy that manages the size and growth rate of the money supply in an economy. It is a powerful tool to regulate macroeconomic variables such as inflation and unemployment.
B: Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation’s economy. It is the sister strategy to monetary policy through which a central bank influences a nation’s money supply.
C: The supply-side theory is an economic concept whereby increasing the supply of goods leads to economic growth.while Supply-side policies are government attempts to increase productivity and increase efficiency in the economy. If successful, they will shift aggregate supply (AS) to the right and enable higher economic growth in the long-run.
4: Discuss the various instruments of Macroeconomic Policy you have learnt.
Answers: Macroeconomic policy instruments are macroeconomic quantities that can be directly controlled by an economic policy maker.[1][2] Instruments can be divided into two subsets: a) monetary policy instruments and b) fiscal policy instruments. Monetary policy is conducted by the central bank of a country (such as the Federal Reserve in the U.S.) or of a supranational region (such as the Euro zone). Fiscal policy is conducted by the executive and legislative branches of the government and deals with managing a nation’s budget.
5. Clearly outline and discuss the various conflicts that can arise from pursuing Macroeconomic Policy Objectives and suggest how such conflicts can be resolved.
Answer: One macro economic conflict can come between economic growth and inflation which leads to a similar conflict between unemployment and inflation. If therevis rapid economics growth, it is more likely that inflationary pressure will increase.
UGWU UKAMAKA MARYTHERES
ugwuukamakamarytheres1@gmail.com
UNN/J21/SOCS/010
1. Macroeconomic policy is concerned with the operation of the economy as a whole. In broad terms, the goal of macroeconomic policy is to 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.
The major goals of microeconomic policy are efficiency, equity and growth. Economic growth is often treated as a macroeconomic issue, but it is closely related to the micro-behaviour of the economy and the functioning of markets.
2. MACROECONOMIC OBJECTIVES
Broadly, the objective of macroeconomic policies is to maximize the level of national income, providing economic growth to raise the utility and standard of living of participants in the economy. There are also a number of secondary objectives which are held to lead to the maximization of income over the long run. While there are variations between the objectives of different national and international entities, most follow the ones detailed below:
1. Sustainability – a rate of growth which allows an increase in living standards without undue structural and environmental difficulties. ‘Economic growth’ will be studied later on in this book.
2. Full employment – where those who are able and willing to have a job can get one, given that there will be a certain amount of frictional, seasonal and structural unemployment (referred to as the natural rate of unemployment).
3. Price stability – when prices remain largely stable, and there is not rapid inflation or deflation. Price stability is not necessarily the same as zero inflation, but instead steady levels of low-moderate inflation is often regarded as ideal. It is worth noting that prices of some goods and services often fall as a result of productivity improvements during periods of inflation, as inflation is only a measure of general price levels. However, inflation is a good measure of ‘price stability’. Zero inflation is often undesirable in an economy. (“Internal Balance” is used to describe a level of economic activity that results in full employment with no inflation.)
4. External Balance – equilibrium in the Balance of payments without the use of artificial constraints. That is, the value of exports being roughly equal to the value of imports over the long run.
5. Equitable distribution of income and wealth – a fair share of the national ‘cake’, more equitable than would be in the case of an entirely free market. Like the other economic objectives, the distribution of income is a partly subjective or normative issue
6. Increasing Productivity – more output per unit of labour per hour. Also, since labor is but one of many inputs to produce goods and services, it could also be described as output per unit of factor inputs per hour.
7. Trade Equilibrium – equilibrium in the Balance of payments without the use of artificial constraints. That is, exports roughly equal to imports over the long run.
3. What do you understand by the following concepts?
A. Monetary Policy
B. Fiscal Policy
C. Supply side theory and supply-side policies
A. Monetary policy is the control of the quantity of money available in an economy and the channels by which new money is supplied. By managing the money supply, a central bank aims to influence macroeconomic factors including inflation, the rate of consumption, economic growth, and overall liquidity.
B. Fiscal policy is the use of government spending and taxation to influence the economy. Governments typically use fiscal policy to promote strong and sustainable growth and reduce poverty.
C. The supply-side theory is an economic concept whereby increasing the supply of goods leads to economic growth. Also defined as supply-side fiscal policy, the concept has been applied by several U.S. presidents in attempts to stimulate the economy.
Supply-side policies are policies that aim to increase productivity and efficiency in the economy. The objective of supply-side policies is to boost aggregate supply (AS) to result in increased output. In this case, the LRAS shifts to the right and national output levels increase, meanwhile the price level decreases.
4. INSTRUMENTS OF MACROECONOMIC POLICY
FISCAL POLICY
Fiscal policy operates through changes in the level and composition of government spending, the level and types of taxes levied and the level and form of government borrowing. Governments can directly influence economic activity through recurrent and capital expenditure, and indirectly, through the effects of spending, taxes and transfers on private consumption, investment and net exports.
As an instrument for stabilising fluctuations in economic activity, fiscal policy can reflect discretionary actions by government or the influence of the ‘automatic stabilisers’. A fiscal stimulus package is an example of discretionary action by government intended to support aggregate demand by increasing public spending and/or cutting taxes.
MONETARY POLICY
Monetary policy decisions are implemented by changing the cash rate (the interest rate on overnight loans in the money market). The cash rate is determined in the money market by the forces of supply and demand for overnight funds. Through open market operations the RBA can target the cash rate by increasing or decreasing the supply of funds that banks use to settle transactions among themselves. For example, if the Naira wants to lower the cash rate it can supply more exchange settlement funds than the commercial banks want to hold. In this case, banks will respond by offloading funds, which pushes the cash rate lower.
By changing the cash rate the Naira is able to influence interest rates across the financial system. Changes in interest rates in turn can influence economic activity by affecting savings and investment behaviour, household expenditure, the supply of credit, asset prices and the exchange rate.
EXCHANGE RATE POLICY
Exchange rate policy is concerned with how the value of the domestic currency, relative to other currencies, is determined. The exchange rate policy refers to the manner in which a country manages its currency in respect to foreign currencies and the foreign exchange market. The exchange rate is the rate at which the domestic currency can be converted into a foreign currency.
5. Clearly outline and discuss the various conflicts that can arise from pursuing Macroeconomic Policy Objectives and suggest how such conflicts can be resolved.
1. Economic growth vs inflation
One macro-economic conflict can come between economic growth and inflation (which leads to a similar conflict between unemployment and inflation). If there is rapid economic growth, it is more likely that inflationary pressures will increase. Inflation is particularly likely to occur when growth is above the long run trend rate, and AD increases faster than AS.
When the economy is growing very quickly, firms have difficulty employing sufficient skilled labour; this can lead to wage inflation and higher wages cause higher prices. Also, if demand grows faster than supply, firms will respond to shortages by putting up prices.
Inflationary growth
In this diagram, there is an increase in AD, when the economy is close to full capacity. We get an increase in real GDP but also an increase in the inflation rate.
Example of conflict between economic growth and inflation
In the late 1980s during the Lawson boom, the UK experienced a high rate of economic growth (4-5% a year). This growth rate was above the long run trend rate of growth but caused inflationary pressures to increase. Also if growth is very quick, there may be supply constraints pushing up commodity price increases. This economic boom of the 1980s proved unsustainable and ultimately led to the recession in 1991 (as the government increased interest rates to try and control inflation.
Low inflationary growth
However, it is possible to have economic growth without causing inflation. If growth is sustainable – if it is close to the long run trend rate, then LRAS will increase at the same rate as AD, and therefore, we will not see inflation.
2. Economic growth vs balance of payments
When economic growth is led by consumer spending, it tends to cause a deficit in the current account. This is because as consumer spending rises, there will be a rise in import spending. This is especially true in the UK, where traditionally we have a high marginal propensity to import (MPM). Also, high economic growth may increase inflation and make exports less competitive.
3. Economic growth vs budget deficit
A government may feel it needs to reduce the budget deficit. This will require higher taxes and lower spending. However, this tightening of fiscal policy will lead to a fall in AD and lead to lower economic growth.
Similarly, if the government wants to boost the rate of economic growth it could pursue expansionary fiscal policy (tax cuts/spending rises). This should increase aggregate demand and help economic growth – but there will be a side effect, the budget deficit will rise.
4. Economic growth vs environment
There can be a strong conflict between economic growth and environmental objectives. Higher GDP leads to higher levels of pollution and consumption of non-renewable resources.
However, it is possible to have economic growth without harming the environment. For example, the development of solar panels has helped increase energy productivity, but it is also better for the environment than burning coal.
5. Conflict between unemployment and inflation
There is often a trade off (at least in the short run) between unemployment and inflation. In a period of high growth – jobs are created, causing unemployment to fall. But, as unemployment falls, it can put upward pressure on wages, leading to inflation.
1: Macroeconomic policy is concerned with the operation of the economy as a whole. In broad terms, the goal of macroeconomic policy is to 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.
2: The objective of macroeconomic policies is to maximize the level of national income, providing economic growth to raise the utility and standard of living of participants in the economy.
1 Sustainability – a rate of growth which allows an increase in living standards without undue structural and environmental difficulties. ‘Economic growth’ will be studied later on in this book.
1. Full employment – where those who are able and willing to have a job can get one, given that there will be a certain amount of frictional, seasonal and structural unemployment (referred to as the natural rate of unemployment).
2. Price stability – when prices remain largely stable, and there is not rapid inflation or deflation. Price stability is not necessarily the same as zero inflation, but instead steady levels of low-moderate inflation is often regarded as ideal.
3. Monetary policy is a set of tools that a nation’s central bank has available to promote sustainable economic growth by controlling the overall supply of money that is available to the nation’s banks, its consumers, and its businesses
B Fiscal policy refers to the use of government spending and tax policies to influence economic conditions, especially macroeconomic conditions, including aggregate demand for goods and services, employment, inflation, and economic growth.
C The supply-side theory is an economic concept whereby increasing the supply of goods leads to economic growth.
4 Monetary policy
Fiscal policy
5 (i) Inflation and unemployment
(II) Economic growth and balance of payment on the current account.
(iii) Economic growth and income redistribution
(iv) increased employment and sustainable environment.
Onyima John Chinedu
UNN/J21/SOCS/020
Eco 004- Second Assignment
1. Macroeconomic policy is concerned with the operation of the economy as a whole. In broad terms, the goal of macroeconomic policy is to 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. The key pillars of macroeconomic policy are: fiscal policy, monetary policy and exchange rate policy. This brief outlines the nature of each of these policy instruments and the different ways they can help promote stable and sustainable growth.
2. Sustainability – a rate of growth which allows an increase in living standards without undue structural and environmental difficulties. ‘Economic growth’ will be studied later on in this book.
Full employment – where those who are able and willing to have a job can get one, given that there will be a certain amount of frictional, seasonal and structural unemployment (referred to as the natural rate of unemployment).
Price stability – when prices remain largely stable, and there is not rapid inflation or deflation. Price stability is not necessarily the same as zero inflation, but instead steady levels of low-moderate inflation is often regarded as ideal. It is worth noting that prices of some goods and services often fall as a result of productivity improvements during periods of inflation, as inflation is only a measure of general price levels. However, inflation is a good measure of ‘price stability’. Zero inflation is often undesirable in an economy. (“Internal Balance” is used to describe a level of economic activity that results in full employment with no inflation.)
External Balance – equilibrium in the Balance of payments without the use of artificial constraints. That is, the value of exports being roughly equal to the value of imports over the long run.
Equitable distribution of income and wealth – a fair share of the national ‘cake’, more equitable than would be in the case of an entirely free market. Like the other economic objectives, the distribution of income is a partly subjective or normative issue
Increasing Productivity – more output per unit of labour per hour. Also, since labor is but one of many inputs to produce goods and services, it could also be described as output per unit of factor inputs per hour.
Trade Equilibrium – equilibrium in the Balance of payments without the use of artificial constraints. That is, exports roughly equal to imports over the long run.
3. The supply-side theory is an economic concept whereby increasing the supply of goods leads to economic growth. Also defined as supply-side fiscal policy, the concept has been applied by several U.S. presidents in attempts to stimulate the economy. Comprehensively, supply-side approaches target variables that bolster an economy’s ability to supply more goods and services.
Monetary policy refers to central bank activities that are directed toward influencing the quantity of money and credit in an economy. By contrast, fiscal policy refers to the government’s decisions about taxation and spending. Both monetary and fiscal policies are used to regulate economic activity over time. They can be used to accelerate growth when an economy starts to slow or to moderate growth and activity when an economy starts to overheat. In addition, fiscal policy can be used to redistribute income and wealth.
4. Full employment:
Performance of any government is judged in terms of goals of achieving full employment and price stability. These two may be called the key indicators of health of an economy. In other words, modern governments aim at reducing both unemployment and inflation rates.
5.Economic growth vs inflation
One macro-economic conflict can come between economic growth and inflation (which leads to a similar conflict between unemployment and inflation). If there is rapid economic growth, it is more likely that inflationary pressures will increase. Inflation is particularly likely to occur when growth is above the long run trend rate, and AD increases faster than AS.
When the economy is growing very quickly, firms have difficulty employing sufficient skilled labour; this can lead to wage inflation and higher wages cause higher prices. Also, if demand grows faster than supply, firms will respond to shortages by putting up prices.
Inflationary growth
ad increase – inflation
In this diagram, there is an increase in AD, when the economy is close to full capacity. We get an increase in real GDP but also an increase in the inflation rate.
Low inflationary growth
However, it is possible to have economic growth without causing inflation. If growth is sustainable – if it is close to the long run trend rate, then LRAS will increase at the same rate as AD, and therefore, we will not see inflation.
long-run-economic-growth-LRAS-AD
Economic growth without inflation. AD and LRAS increasing at the same rate.
The UK between 1993-2007, had a long period of economic expansion. But, this prolonged economic growth did not cause inflation. This is sometimes known as the great moderation.