MACROECONOMIC OBJECTIVES OF THE GOVERNMENT

Learning Objectives Identify the four major macroeconomic objectives; Explain how the government can control the economy.

Government Policy Tools to Control the Economy Fiscal Policy Monetary Policy (Through the Central Bank) Direct Policy

Fiscal Policy Fiscal policy involves the Government changing the levels of Taxation and Govt Spending in order to influence Aggregate Demand (AD) and therefore the level of economic activity.

Purpose of Fiscal Policy Reduce the rate of inflation. Stimulate economic growth in a period of a recession. Basically, fiscal policy aims to stabilise economic growth, avoiding the boom and bust economic cycle.

Fiscal Stance Expansionary (or loose) Fiscal Policy.  This involves increasing AD.  Therefore the govt will increase spending (G) and cut taxes. Lower taxes will increase consumers spending because they have more disposable income(C).  This will worsen the govt budget deficit. Deflationary (or tight) Fiscal Policy  This involves decreasing AD.  Therefore the govt will cut govt spending (G).  And or increase taxes. Higher taxes will reduce consumer spending (C). This will lead to an improvement in the government budget deficit.

Group Activity – Research the following: For a named Caribbean country, discuss TWO negative effects of a Government budget deficit on the economy.

Monetary Policy Controlling the economy by changing the level of money supply. Implemented through the Central Bank.

Direct Policy Refers to all the ways in which the government can directly control the economy to help achieve its macroeconomic objectives. Fiscal and monetary policy are indirect. An eg. of direct policy is if the government wants to reduce unemployment then it would hire unemployed people (URP). If it wishes to directly control inflation then it would set a price ceiling.

Evaluation Which of the following is not a macro economic objective of government: a) Economics growth b) Full employment c) Price stability d) Balanced budgets

Q2 The use of taxes and government spending to influence the level of income in an economy, or to stabilise the economy is called a) Economic policy b) Fiscal policy c) Monetary policy d) Public policy

Q3 A budget deficit is likely to a) Have a contractionary effect on the economy b) Have an expansionary effect on the economy c) Have a neutral effect on the economy d) Have a contractionary effect on the government

Final Evaluation An economy records a rise in unemployment and a fall in business investment. Explain how TWO fiscal policies can be used to address these conditions. (6 marks)