Question

In relation to inflation and employment.

Why government or decision makers try to achieve these TWO macroeconomic objectives

Key problems which may be encountered when attempting to balance these two objectives

Evaluate the macroeconomic measures, employing fiscal and or monetary policies, which could be taken to balance these two objectives.

Answer 1

When inflation increasesthe unemployment declines. Inflation occurs due to an increase in in aggregate suppy or aggregate demand, this increases the output and price level. To raise output, employment increases. The inflation and unemployment holds an inverse relationship. However it is important to maintain balance to ensure price stability and economic growth.

Government can affects trends mainly by through two ways- monetary and fiscal policy. Monetary policies are the actions taken by central banks to control the monetary as well as financial status with the goal of attaining low inflation and sustainable growth in the economy. Broadly, there are two types of monetary policy namely - Expansionary and Contractionary. Expansionary monetary policy is used by FED when it wants to expands (increase) the supply of money to stimulate the economy. An expansionary monetary policy will stimulate investment and consumption spending, and also reduce interest rates thus leading to aggregate demand curve to shift right. Contractionary monetary policy is used by FED when wants to contracts (decrease) the supply of currency of the nation. This decreases the money supply, increases interest rates and reduces the aggregate demand. But proponents of expansionary monetary policy state that during the recession if bank reduces the interest rates for consumers to spend more money during a global recession then in that case the export sector would suffer.

Fiscal policy is the setting of the level of taxation and government spending by government policymakers. Increased government spending may result in an increase in aggregated demand as well as increase in interest rates. This is called the crowding out effect. There are two types of fiscal policy: Expansionary and Contractionary. When government borrows more money thus there will be more demand for capital in the market. This forces the increase in interest rate up induce more people to save to meet that demand. Under the contractionary policy it will be opposite. Usually there are delays in the fiscal policy implementation because few proposed measures may have to go through legislative processes. Moreover when the government applies a mix of expansionary as well as contractionary fiscal policy, it results to conflicts of objectives.