Governments around the world have the following objectives:
1. To keep inflation under control
Inflation creates uncertainty and results in the fall in the value of money in terms of goods and services. Inflation also creates uncertainty. Therefore, the governments use macroeconomic policy instruments to keep inflation under control. However, inflation is not bad altogether. It is bad when it is out of control.
2. Maintain a high level of employment
High unemployment is bad for the economy. Unemployment means resources are not being utilized properly. Therefore governments take measures to increase employment. However, full employment is not usually achievable.
3. Economic Growth
If economy grows, people can enjoy higher standards of living. Therefore it is always an important aim of government policies.
4. Redistribution of income
The market system sometimes allows the rich people to become richer and the poor people to become poorer. When the gap between the rich and the poor widens, the national indicators no longer reflect the situation of the average individuals. Therefore, one of the aims of government policies is to redistribute the income.
5. Maintaining a healthy balance of payment
Balance of payment is the difference between a country’s exports and imports. If increases in incomes result in increases in imports while there is no equivalent increases in export revenue, it will result in the balance of payment deficit. a sustained balance of payment deficit for many years will lead to the country to become indebted to the rest of the world. Therefore, the government may take measures to reduce balance of payment deficit.
Next topic: Fiscal and monetary policy