Government Macroeconomic Objectives

What are the government macro economic objectives?

TIGERDS

Trade (Balanced, also related to healthy balance of payments which trade can be a large component),
Inflation (low and stable, concerns price stability),
economic Growth (sustained and sustainable),
Employment (full),
Redistribution of wealth (fair),
economic Development and inclusive growth. (holistic. SOL of the country should growth together)
SUSTAINABILITY!

Why is low and stable inflation important?

If you have high inflation or unstable prices:
- firms face uncertainty, reduce investments, lower AD
- rapid rising prices due to cost push inflation erode real wages, purchasing power drop, drop in SOL, ask for wage hike, further cost push inflation
- export competitiveness affected
- think of all knock-on effects with a proper chain of thought.

Benefits are:
- investments easier to make
- Bank can predict future value of money and adjust interest accordingly, so people can save more, which gives banks more loanable funds. Cost of borrowing decreases eventually because interest rate lowers and people invest more.

Why is price stability a key macroeconomic objective?

Price stability ensures overall macroeconomic stability and prevents excessive inflation, which can erode real income, reduce purchasing power, and negatively affect the standard of living.

Think links for the above!

What are the negative effects of rapid inflation?

Rapid inflation can cause:
Declines in real income and purchasing power.
Higher wage demands, leading to cost-push inflation.
Increased costs of production, reducing profits and investment.
Higher export prices, reducing competitiveness and increasing the current account deficit (if M-L holds).

Think links for the above!

What are the benefits of low and stable inflation?

Low inflation fosters:
A conducive environment for savings and investments.
Greater certainty for banks, consumers, and investors.
Lower interest rates, which stimulate consumption and investment.
International competitiveness due to low production costs.
Avoidance of cyclical economic fluctuations like booms and busts.

Think reasons and link for the above!

What is the target unemployment rate, and why is it important?

The target unemployment rate, or the natural rate of unemployment, is approximately 5%.

Achieving this rate ensures that the macroeconomy operates at full capacity, with no output gaps or demand-deficient unemployment.

What are the societal and economic consequences of high unemployment?

High unemployment leads to:
Loss of potential output and wasted resources.
Declines in self-worth and skills of individuals, reducing long-term aggregate supply.
Increased social unrest and crime.
Higher government expenditure on unemployment benefits and reduced tax revenues.

Think links for the above! Reasons!

What are the benefits of low unemployment?

Low unemployment results in:
Higher average incomes and improved standards of living.
Increased real GDP and greater availability of goods and services.
Reduced fiscal burden on the government, allowing for investments in infrastructure, healthcare, and education.

Think links for the above!

Why is stable and sustainable economic growth preferred?

Stable growth prevents inflationary pressure and allows aggregate supply to expand and catch up with aggregate demand, enabling long-term improvements in income, employment, and poverty reduction.

Sustainable growth does the above without depleting resources or causing environmental harm.

What are the downsides of unsustainable growth?

Unsustainable growth can lead to:

Rapid depletion of scarce natural resources.
Increased pollution and climate change.
Inflation if income levels exceed potential output.

What is economic development, and what does it aim to achieve?

Economic development involves improving the standard of living of the whole country, particularly for the poorest groups.
It aims to achieve:
Higher incomes and employment.
Better access to food, housing, healthcare, and education.
A more equitable distribution of resources.

What is the goal of sustainable growth?

Sustainable growth ensures that current economic improvements do not come at the expense of future generations and maintains a healthy, clean, and safe environment for all.

Why is inclusive growth important?

Inclusive growth ensures that economic prosperity benefits all sections of society, preventing inequality where only a few reap the rewards of economic booms.

What is the Balance of Payments (BOP), and why is equilibrium important?

The BOP is an accounting record of all economic transactions between a country and the rest of the world over a period of time.

A balanced BOP avoids falls in national output, employment, and standard of living due to trade deficits.

What happens during a persistent BOP deficit?

A persistent deficit due to a trade deficit can lead to: Reduced domestic output and rising unemployment. Government borrowing may increase as well.

How do governments redistribute income and wealth?

Redistribution is achieved through:
Taxes on higher-income groups, including capital gains and inheritance taxes.
Increased government spending on welfare and benefits for lower-income groups.

Why is redistribution particularly challenging in developing economies?

Many developing economies lack the resources and fiscal structures to effectively reduce inequality, making it harder to address income and wealth disparities.