10.3 Effectiveness of Policy Options to Meet All Macroeconomic Objectives

📌 Background: What Are Macroeconomic Objectives?

Before we look at each policy, you need to know what governments are trying to achieve. These goals are called macroeconomic objectives — the big economic targets a country aims for. The main ones are:

• Economic growth — the economy producing more goods and services over time (measured by rising GDP)
• Low and stable inflation — keeping prices from rising too fast (e.g. a target of around 2%)
• Low unemployment — making sure most people who want jobs have them
• Balance of payments equilibrium — keeping imports and exports roughly balanced so the country is not spending far more than it earns abroad
• Redistribution of income — reducing the gap between the rich and the poor

Governments use different policy tools to try to hit these targets. Let's go through each one.

1. Fiscal Policy

What Is Fiscal Policy?

Fiscal policy is when the government changes its own spending or taxation to influence the economy. Think of it like a household budget — the government decides how much to spend and how much tax to collect, and this affects the whole economy.

There are two types:

• Expansionary fiscal policy: The government spends more or cuts taxes to boost the economy (used when the economy is slow or in recession). This increases aggregate demand (the total spending in the economy).
• Contractionary fiscal policy: The government spends less or raises taxes to slow the economy down (used when inflation is too high). This decreases aggregate demand.