QUESTION 3 [25 marks]
Evaluate any four macroeconomic objectives and explain how you would steer the economy to
achieve the objectives. (The use of appropriate AD and AS curves to illustrate your answer is
expected).
There are several macroeconomic objectives that government and central banks work towards achieving in order to promote stability and growth in the economy. Four of these objectives are:
1. Price stability: Price stability refers to the objective of keeping inflation low and stable. This is important as high inflation erodes the purchasing power of money and can lead to economic instability. To steer the economy towards achieving price stability, the government can use monetary policy tools, such as adjusting interest rates and implementing open market operations, to control the money supply and regulate inflation. The central bank can increase interest rates to reduce consumer spending and investment, which can help keep inflation in check.
To illustrate this, we can use the aggregate demand (AD) and aggregate supply (AS) model. If the economy is experiencing inflationary pressure, the AD curve will shift to the left, indicating a decrease in aggregate demand. This decrease in demand will lead to a decrease in prices and inflation rates, helping to achieve price stability.
2. Full employment: Full employment refers to the objective of achieving the highest possible level of employment in the economy. This is important as it ensures that all available resources are being utilized efficiently and that individuals have access to income and economic opportunities. To steer the economy towards achieving full employment, the government can use fiscal policies, such as increasing government spending and cutting taxes, to boost aggregate demand and stimulate economic activity. This can lead to an increase in job creation and reduce unemployment rates.
Using the AD-AS model, if the economy is experiencing a recession and high unemployment, the government can increase government spending or cut taxes to stimulate aggregate demand. This will shift the AD curve to the right, leading to an increase in output and employment levels.
3. Economic growth: Economic growth refers to the objective of increasing the production of goods and services in the economy over time. This is important as it leads to higher living standards, increased job opportunities, and improved economic welfare. To steer the economy towards achieving economic growth, the government can implement supply-side policies, such as investing in infrastructure, education, and research and development. These policies can help increase productivity and enhance the long-term potential of the economy.
Using the AD-AS model, if the government implements supply-side policies, the AS curve will shift to the right, indicating an increase in aggregate supply. This will lead to an increase in output and economic growth.
4. Balance of trade: The balance of trade refers to the objective of achieving a balance between exports and imports in international trade. A positive balance of trade, or a trade surplus, indicates that a country is exporting more goods and services than it is importing, while a negative balance of trade, or a trade deficit, indicates the opposite. To steer the economy towards achieving a balanced trade, the government can implement trade policies, such as imposing tariffs or quotas on imports, to reduce import levels and promote domestic industries. Additionally, the government can also focus on improving competitiveness and productivity of domestic industries to increase exports.
Using the AD-AS model, if the government implements trade policies to reduce imports, the AD curve will shift to the right, indicating an increase in aggregate demand for domestically produced goods and services. This will lead to an increase in output and employment levels, helping to achieve a more balanced trade.
Overall, achieving these macroeconomic objectives requires a combination of fiscal and monetary policies, as well as structural reforms, to influence aggregate demand and supply in the economy. It is important for policymakers to carefully manage these policies to ensure a balance between the different objectives and promote long-term sustainable growth.