Macroeconomic Objectives and Government Policies

There are 6 macroeconomic goals, these include:

• Economic Growth - Countries want to encourage increased output of a country. Economic growth only occurs when output increases and prices remain stable.
• Controlled inflation - have stable prices (price stability), inflation affects factors such as employment and production of a country
• High employment - high unemployment puts a financial burden on governments
• Stable balance of payments - Try to have a balanced balance of payments and avoid surpluses or deficits.
• Income redistribution - Spread wealth by taxing rich and giving to the poor (Robin Hood)
• Environmental Policies - Governments want to make sure the environment is protected and that resources are used sustainably (so there's stuff left for future generations)

Governments provide jobs, merit, and public goods to society. The objectives of governments as a producer is to:

• Protect public interest - provide what the private sector does not
• Improve economy - Through investment
• Support key industries - Industries that are important to the country
• Manage macroeconomy - implement different policies to better the economic situation
• Reduce inequality - support vulnerable people (jobless, old, etc.)

The government also plays the role of producer through:

• Creating national champion industries - Big important companies in the economy
• Running natural monopolies - run to avoid doubling of resources or protection of consumers from exploitation
• Provision of public goods
• Supplying merit goods
• Providing welfare services

Governments implement laws and enact policies in order to:

• Promote competition between small and medium enterprises.
• Decrease externalities.
• Prevent overcrowding in cities.

They can also regulate the private sector by enacting laws about:

• The quality and safety of goods and services produced.
• the right of employees.
• the protection of consumers from defective/hazardous products.

Governments also can influence the location of a business in order to:

• Revive economically depressed regions (areas with high unemployment).
• Reform overcrowded areas with high pollution/congestion.

Governments aim to regulate the market and competition within that market. They do so in order to provide:

• Wider choice for consumers
• High price competition
• Improvements in R&D investment

They do so by enacting anti-competition laws that prevent the following:

• The formation of cartels - Businesses agreeing on staying out of each other areas and potentially agreeing on fixing prices etc.
• The formation of monopolies - Monopolies result in one major producer/supplier in the market resulting in potential barriers to entry for other new businesses.
• Predatory pricing - Reducing prices below production costs to prevent competition from entering.

Forms of subsidies include:

• Guaranteed payments - Guarantees min price for producers.
• Input subsidy - Makes inputs cheaper reducing the cost of production.
• Grants to cover financial losses - Support of loss-making industries.
• Bailouts - Financial support for companies facing bankruptcy.
• Loans and grants - Loans at a low interest rate or provides grants for economically depressed areas.

Arguments for subsidies include:

• Decrease in price, helping control inflation
• Consumption of goods and services that yield positive externalities
• Firms make more profit, they can reinvest into R&D
• Industries protected against failure
• Help save jobs

Arguments against subsidies include:

• Add to government expenses
• Involve opportunity cost
• Artificial protection of inefficient firms
• Can distort free market mechanisms
• Decisions about who gets subsidies can be arbitrary.

Supply-side policies are long-term policies that aim to promote economic growth by targeting:

• The efficiency of employees
• Investment by firms
• New job opportunities
• The productivity of firms

The instruments of supply-side policies include:

• Selective tax incentives - Tax reliefs etc, encourages investment and such.
• Selective subsidies - Government pays businesses helping them with production costs and potentially increasing firm output.
• Labor market reform - Restricting Trade Union power or lowering unemployment benefits to encourage employment.
• Privatization - Since profit maximization is the main objective businesses will be more efficient.
• Deregulation - Removal of international trade barriers, etc.

Benefits of Supply-side policies:

• Increase in Aggregate supply.
• Lower Unemployment.
• Improve economic growth.
• Improve international competitiveness.

Limitations of Supply-side policies:

• They are subject to time lags.
• May be expensive.
• Increase financial burdens on government and taxpayers.

Expansionary Fiscal Policy Effects:

Positive:                                                                   Negative:

• AD Increases.                                                      > Inflation.
• Output and GDP increases.                                 > Lower taxes result in more imports
• Unemployment Decreases.                                 > Government debt increase.
• More public/merit goods                                     

Deflationary Fiscal Policy Effects:

Positive:                                                                   Negative:

• Helps Dampen Inflation                                     > Unemployment increases
• Government receives more revenue                   > AD, output and GDP decrease
• Lower disposable income                                   > Less public/merit goods                                

Loose Monetary Policy Effects:

Positive:                                                                   Negative:

• Investment up, Interest rate down.                    > AD increase can lead to inflation.
• Cheaper currency, increase in exports.              > Imports might increase.
• More money = bigger AD.                                > Foreign investment fall.
• Achieves economic growth.                                     

Tight Monetary Policy Effects:

Positive:                                                  Negative:

• Interest rate up. Inflation down.         > Interest up, Investment down.
• Encourages saving.                            > Mortgages go up, purchasing power decreases
• Cheaper imported raw materials        >Firms profit decrease, AD decrease