Government macroeconomic policy objectives

Economics AS · Government macroeconomic intervention. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.

Test this topic free All Economics AS topics

The idea

A government tries to manage the whole economy. At AS Level you need three main aims: price stability, low unemployment and economic growth.

Price stability does not mean prices never change. It means a low and steady rate of inflation, often a target such as 2% a year. Low unemployment means most people who want a job can find one, so resources are not wasted. Economic growth means real GDP rises over time, which allows higher living standards.

To reach these aims the government and the central bank use fiscal policy, monetary policy and supply-side policy. The right policy depends on which aim is being missed and why.

Rules to remember

Price stability = a low, stable rate of inflation (for example a 2% target), not zero price change.
Low unemployment = a small percentage of the labour force is without work and looking for it.
Economic growth = an increase in real GDP over time (measured as the % change in real GDP).
Falling prices (deflation) are not the aim: people delay spending and the real value of debt rises.
Demand too high and inflation above target: use contractionary fiscal or monetary policy.
Demand too low and unemployment high: use expansionary fiscal or monetary policy.
Growth without extra inflation near full capacity: use supply-side policy to raise productive capacity.

Common mistake

Students often say price stability means zero inflation or falling prices. It means a low, positive and steady rate of inflation.

Worked example

A government's targets are inflation of 2%, unemployment below 5% and real GDP growth of at least 2.5%. This year inflation is 1.9%, unemployment is 9% and real GDP grows by 0.4%. Which objectives are missed, and what type of policy fits?

Inflation of 1.9% is very close to the 2% target, so price stability is met.
Unemployment of 9% is above 5% and growth of 0.4% is below 2.5%, so both of these objectives are missed.
High unemployment with slow growth and no inflation problem points to weak aggregate demand.
A policy that raises aggregate demand is suitable, such as lower interest rates or higher government spending.

Answer: Low unemployment and economic growth are missed; an expansionary policy is suitable.

Ask about this

Type what you are stuck on. The helper finds the explanation, worked examples and the notes to read, free and instant.

Read the full notes

Keep going

← Price stability Fiscal policy →Take a Economics AS test