Four main objectives

Strong economic growth

Governments want economic growth to be high but not too high

In general, economic growth will improve the standard of living in a country

Keeping inflation low

In the UK, the government aims for inflation of 2%

Monetary policy committee of the Bank of England uses monetary policy to try and achieve this target rate

Reducing unemployment

Government aims to reduce unemployment and move towards full employment

If more people are employed then the economy will be more productive

Aggregate demand will also increase as more people will have a greater income

Equilibrium in the balance of payments

Governments want equilibrium in the balance of payments i.e. they want earning from exports and other inward flows of money to balance the spending on imports and other outward flows of money

This is more desirable than a long term deficit or surplus in the balance of payments- which can cause problems

Different types of economic growth

Economic growth is an increase in the productive potential of an economy

In the short run, economic growth is measured by percentage change in real national output- this is known as actual real growth (this just means that the effect of inflation had been removed from the growth figure)

Increases in actual growth are usually due to an increase in aggregate demand but can also be caused by an increase in aggregate supply

Long run growth is caused by an increase in the capacity, or productive potential of the economy- this usually happens due to a rise in the quality or quantity of inputs (factors of production)

Long run growth is shown by an increase in the trend rate of growth- this is the average rate of economic growth over a period of both economic booms and slumps

It rises smoothly rather than fluctuating like actual economic growth so the actual rate of growth often doesn’t match the trend rate

Increases in long run growth are caused by an increase in aggregate supply