Cambridge International as and a level Economics Ebook

The aims of government 
macroeconomic policy
Th
e aims of government macroeconomic policy were 
outlined in 
Chapter 5
. Governments seek to achieve price 
stability. Th
is actually means low and stable infl ation. An 
increasing number of governments are setting an 
infl ation 
target
for their central banks to achieve. An infl ation 
target makes the central bank more accountable and may 
reduce infl ationary expectations if fi rms, householders and 
workers have confi dence in the central bank’s ability to 
meet the target.
Inflation target: 
the rate a central bank is set to achieve.
KEY TERM
Governments may have diff erent aims for the balance of 
payments. Most governments do seek to achieve a balance 
on the current account of the balance of payments over 
time. In the short run, however, a government may welcome 
a current account defi cit if it arises from the import of raw 
materials and capital goods. Alternatively, it may encourage 
a current account surplus in order to boost aggregate 
demand or to provide funds to repay external debt.
A government may also encourage a surplus on the 
fi nancial account of the balance of payments by attracting 
foreign direct investment. Th
e investment could increase 
output and employment in the country.
Th
ere are a range of aims a government may have for its 
exchange rate. A government will usually seek to prevent 
wide fl uctuations in the value of a fl oating exchange rate 
because such fl uctuations are destabilising. It may decide 
to operate a fi xed exchange rate or a managed fl oat. In 
these two cases, it may have to maintain the rate or may 
seek to alter its value. It may attempt to raise the external 
value of the currency in order to reduce infl ationary 
pressure or it may seek to reduce its value to gain a 
competitive advantage.
A lower exchange rate may increase output and 
create jobs. Governments seek to achieve as low 
unemployment as possible. Th
e nearer an economy is 
to full employment, the higher output will be and the 
higher the living standards people are likely to enjoy. 
Governments will be particularly anxious to reduce 
long-term unemployment as such unemployment can 
result in workers being discouraged and dropping out of 
the labour force.
A reduced labour force would lower potential output. 
Governments seek to increase both actual and potential 
output. Th
ey try to achieve sustained growth by matching 
the trend growth in potential output with increases in 
actual output. Th
ey also try to ensure that economic 
growth is sustainable so that future generations will be 
able to enjoy higher living standards. As well as trying to 
achieve economic growth, governments aim for economic 
development. Th
ey seek, for instance, to increase life 
expectancy and educational opportunities.