2.3.6 - Macroeconomic objectives and policies

Governments seek sustained increases in real GDP and, especially, real GDP per capita. Actual growth raises current output; potential growth raises the economy's sustainable capacity.

Growth can raise employment, incomes, profits and the tax base, creating scope for higher material living standards and public services.

Low and stable inflation means a small, predictable rise in the general price level. An inflation target states the rate the monetary authority aims to achieve using monetary policy.

Low unemployment means that most people willing and able to work can find employment. It reduces lost output and skills, poverty, benefit spending and the social costs of joblessness.

The objective is not zero unemployment: frictional job search remains, and structural mismatch may persist even when aggregate demand is strong.

Current-account equilibrium means avoiding a persistent, unsustainable deficit or surplus in trade in goods and services, primary income and secondary income.

A large persistent deficit may require continuing external finance and create debt or exchange-rate vulnerability; a large persistent surplus can indicate weak domestic demand and impose adjustment pressure on partners.

Balance can limit debt accumulation and interest costs, but the appropriate balance depends on the economic cycle and the quality of spending.

Greater income equality means narrowing excessive differences in disposable income, often through progressive taxes, transfers, public services and wider access to education and employment.

The short-run Phillips curve shows a possible inverse relationship between inflation and unemployment. Stronger AD can reduce cyclical unemployment but create demand-pull inflation and wage pressure.

The curve can shift after supply shocks or changed inflation expectations. Supply-side improvement can reduce inflation and unemployment together, so the trade-off is neither fixed nor guaranteed.

Growth based on fossil energy, extraction and congested production can raise emissions, waste and resource depletion. Environmental rules or taxes may raise firms' short-run costs and slow measured output growth.

The objectives can align when clean innovation, renewable infrastructure, energy efficiency and pollution pricing shift production toward lower external cost. Better environmental quality can also protect health and productivity.

Evaluate the source of growth, time horizon, technology and policy design. A temporary investment cost may enable cleaner potential growth later.

If domestic inflation persistently exceeds that of trading partners, domestic exports become less price competitive and imports relatively attractive, tending to worsen the current account, ceteris paribus.

Deflationary policy may lower inflation and imports, improving the current account, but can reduce growth and employment. Exchange-rate appreciation may lower imported inflation yet worsen net exports.

Effects depend on exchange rates, elasticities, non-price competitiveness, imported input costs and supply capacity.

Growth can widen inequality when gains accrue mainly to asset owners, high-skilled workers, profitable regions or capital-intensive firms.

Growth can narrow inequality when it creates broad employment, raises low wages, finances public services and is paired with progressive taxes, transfers and access to skills.

Compare real disposable incomes across the distribution, not just average GDP per capita. The source, ownership and policy treatment of growth determine the outcome.

Supply-side policies aim to increase productivity, competition and incentives, raising sustainable productive capacity and shifting LRAS right.

Successful policy can raise potential growth and employment while easing inflation pressure. Some measures also raise AD in the short run.

Results require genuine competition and capable regulation. Deregulation can weaken worker, consumer or environmental protection; lower tax or benefits can worsen inequality and public finances.

Infrastructure and training spending can raise AD now and LRAS later. Separate the multiplier effect from the eventual productivity effect.

Market policies may be quicker and cheaper but can create market failure; intervention can correct coordination and finance gaps but risks government failure.

Reflationary policy raises AD to support output and employment; deflationary policy lowers AD to reduce demand-pull inflation or external/budget imbalance.

Higher government purchases directly raise $G$ in AD; cuts reduce it. Infrastructure may additionally raise LRAS if it improves productivity.

Lower income tax can raise disposable income and consumption; lower profit tax can raise retained profit and investment; indirect-tax changes can affect both prices/costs and demand.

Changes in spending or tax begin multiplier rounds, but saving, tax and imports leak income. Tax changes depend on households' and firms' responses.

Tightening reverses these directions: borrowing and spending fall, saving is encouraged, credit creation slows and inflation pressure may ease.

The reserve requirement is the share of deposits banks must hold rather than lend. QE is asset purchase with newly created central-bank money, not ordinary government spending.

Lender-of-last-resort support can prevent a liquidity crisis spreading, but conditions and supervision are needed to limit moral hazard.

Fiscal policy can target groups, regions and infrastructure but faces political/implementation lags and debt cost. Monetary policy can change quickly and independently but is broad, uncertain and weak near very low rates or during credit stress.

A policy mix can combine demand stabilisation with supply-side measures, but conflicting settings can offset each other.