2.6.1 Possible Macroeconomic Objectives

Question 1

What are the macroeconomic objectives?

Answer 1

• price stability, low inflation (2% +/- 1%)
• sustainable economic growth
• reduced, low unemployment
• current account balance (small surplus) for the BOP
  ~
• more income equality
• protect the environment
• reduce the budget/fiscal deficit

Question 2

What are the conflicts of macroeconomic objectives?

Answer 2

• an increase in AD will reduce unemployment + increase GDP = budget deficit reduced, greater tax revenue due to growth + lower benefits
• HOWEVER demand pull inflation may occur = could cause current account deficit - higher disposable income increases demand for imports - trade balance deteriorates

Question 3

Conflict of objectives from monetary policy

Answer 3

• increasing interest rates to reduce AD
• increasing interest rates can make the distribution of income less equal
• higher income groups can afford to save more + they get a higher return for saving
• lower income groups may need to borrow more + will need to repay more in interest

Question 4

Conflict of objectives for contractionary fiscal policy

Answer 4

• increase in indirect tax
• these taxes tend to act regressively = take a greater proportion of a lower income
• makes the distribution of income more unequal