Question

1. why governments or decision makers try to achieve the two macroeconomic objectives (maintaining stable and sustainable economic growth , and maintaining an acceptable level of inflation) ?

2. what are key problems which may be encountered when attempting to balance these two objectives?

Answer 1

1.

Government or decision makers consider two objectives as mentioned, because it helps not only to maintain price stability, but also to stimulate the aggregate demand that can make firms to produce and create new jobs. In this process,  price level also increases with a control upon it so that economy expands.

If government focuses at only one objective such as economic growth, then it will create high inflation and currency will be weakened. It will cause more problems to the balance of trade and savings will be discouraged.

If only price stability is set to be objective, then firms are discouraged due to lower demand. It creates higher unemployment in the economy. So, not considering both the objectives at the same time, makes economy to face instability or slowdown. So, both of the mentioned objectives are pursued by the government or decision makers.

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2.

The first key problem is the inverse relationship between growth and price stability. A higher level of growth rate, causes inflation to increase and vice versa. It can make policy paralysis where neither growth nor price stability is achieved properly. The second key problem is the impact upon value of the domestic currency. If economic growth and inflation is pursued, then value of currency depreciates and it creates more problems for the importers as they have to pay more for the Imports. So, there is a creation of greater imbalance in BoT. It creates saving to decreases and causes upward pressure upon the rates. The third problem is the focus upon deficit based financing that further increases the debt level. Hence, bigger part of the GDP is being used to repay the interest and debt level.

So, above are some of the problems faced while balancing both the objectives.