Question

Name the 3 goals of macroeconomic policy and the ways/tools that the government uses to contribute to their achievement? Include both the aggregate demand and supply model to support/explain your answer.

Answer 1

3 goals of macroeconomic policy are:

• Low unemployment
• Low inflation
• Higher Economic Growth

Government uses two policies to follow these goals:

1) Expansionary Fiscal Policy: Government cuts taxes and raised their spending with the help of this policy. Cut in tax raise disposable income of consumers and raise aggregate demand in the economy and shift aggregate demand curve to its right from AD to AD1.

2) Expansionary Monetary Policy: Fed uses this policy to raise money supply in the economy by reducing rate of interest. Reducing rate of interest will help producers in producing more of the goods at lower cost which shifts supply curve to its right from AS to AS1.

Both of these factors combined shift the economic equilibrium from point A to C which will result in higher output frm Y to Y2 while keeping price the same at P. More output produced will hire more labor and raise employment level in the economy.