Policy objectives and conflicts

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Economic objectives of macro policy

Ultimate objective is to improve economic welfare for all of the population

  • Full employment (or low unemployment)
  • Economic growth (and higher living standards)
  • a fair or equitable distribution of income and wealth
  • Control of inflation (or price stability)
  • an external policy objective such as satisfactory balance of payments or a particular exchange rate target
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Keynesian macro policy

Use of demand management policies to try to achieve full employment and economic growth
To achieve these objectives, the government reflates the economy by injecting demand into the economy

Expansionary or reflationary Monetary policy

  • cutting interest rates - however as the economy approaches full employment, the expansion of demand tends to draw in too many imports and/or increase inflation
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  • These problems may force the government to reverse policy in order to reduce the level of AD

Deflationary policies - can be used to reduce inflationary pressures to improve B of P

  • increase interest rates (monetary policy)
  • Public spending cuts and increased taxes (fiscal policy)
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Free-market macro policy

Monetarism

  • Inflation is caused by an excessive rate of growth of the money supply
  • To control inflation, the rate of growth in the money supply must first be controlled
  • Competitive markets and entrepreneurship create full employment and that governments should be enablers rather than providers
  • They maintain that the function of government is to foster the conditions in which competitive and efficient markets can create jobs and productive growth
  • One of these conditions is low inflation
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Conflcts between policy objectives and trade-offs

A conflict exists when it is impossible to achieve two or more objectives at the same time.

The government attempts to resolve this by achieving relatively satisfactory perfomance with regard to conflicting objectives - accepting higer unemployment and lower growth (for a time) in order to reduce inflation or improve the balance of payments

Conflicts and policy trade-offs

  • conflict between the internal policy objectives of full employment and growth and the external objective of achieving satisfactory balance of payments

  • conflict between full employment and the control of inflation - the phillips curve trade-off

  • Conflict between economic growth and a more equal distribution of income and wealth - during keynesian era, progressive taxation and transfers to the poor were used to reduce inequalities between rich and poor - they reduce entrepreneurial and personal incentives, inhibit growth and make the economy less competitive
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