Study Note - Macroeconomic policy objectives

What are objectives and how are they different from instruments?Objectives are the aims or goals of government policyInstruments are the means by which these aims might be achieved

For example, the government might want to achieve an objective of a low rate of inflation. The main instrument to achieve this are changes in monetary policy interest rates and since May 1997 they have been set by the Bank of England. Fiscal policy could be another instrument to achieve this aim. This is in the hands of the government. Supply-side policies can also be used to control inflation and promote growth. The government might have another objective – namely to make the distribution of income and wealth more equal. It would then choose the policy instruments it thinks are best suited to reaching to this aim, perhaps a change in the income tax system or a rise in the national minimum wage .

The main policy instruments available to meet macroeconomic objectives are

Monetary policy –changes to interest rates, the supply of money and credit and also changes to the value of the exchange rateFiscal policy – changes to government taxation, government spending and borrowingSupply-side policies designed to make markets work more efficiently

The Objectives of UK Macroeconomic Policy

The key objectives for the UK are:

Stable low inflation - the Government’s inflation target is 2.0% for the consumer price index. The Monetary Policy Committee sets interest rates at a level it thinks will meet the inflation target over a two year horizon. Sustainable growth – as measured by the growth of real gross domestic product – sustainable in keeping inflation low and in reducing the environmental impact of growth. Improvements in productivity – this is designed to improve competitiveness and trade performance. The pressures of globalisation and the increasing competition within the European Single Market make this one of the key objectives of the government. High employment - the government wants to achieve full-employment – a situation where all those able and available to find work have the opportunity to work. At the time of writing, the key aim is to limit the effects of the recession on the level of unemployment.Rising living standards and a fall in relative poverty – for example the objective of cutting child poverty and reducing pensioner poverty.Sound government finances - including control over government borrowing and the total national debt.

What is meant by economic stability?

Economic stability occurs when there is an absence of big swings in prices, output and jobs.

The national output of a country does not grow in a steady fashion from one year to the next. All countries experience an economic cycle which tracks the fluctuations in the rate of growth of a country’s Gross Domestic Product (GDP).