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Chapter 11

Macroeconomic policy

Macroeconomic policy is the management of the economy by
government in such a way as to influence the performance and
behaviour of the economy as a whole.

1.1 Principal objectives

Organisations set objectives which will satisfy key stakeholders, such as:

 full employment of resources – full and stable employment

 price stability – little or no inflation

 economic growth – improving living standards

 balance of payments equilibrium – ratio of imports to exports

 an appropriate distribution of income and wealth – dependent on prevailing
political view

The pursuit of these objectives may involve conflict and trade-offs, e.g.

Full employment versus price stability

At full employment levels there is no room for supply of goods and services to grow
further. If demand for products increases then without extra supply being available,
prices will rise.

Economic growth versus balance of payments

If the economy grows rapidly it can take a while for suppliers to increase their
productivity to match. As a result the growth comes from imports in the meantime,
leading to a deficit on the balance of payments.

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