Essay On Macroeconomics

a) The main macroeconomic objectives of a government are price stability, full employment, economic growth and an equitable income of distribution. Price stability is a situation in which prices in an economy don't change much over time. Price stability would mean that an economy would not experience inflation or deflation. It is not common for an economy to have price stability of course, since there are always factors that are affecting it. Consumers and businesses alike must be able to trust that inflation is kept under control. Price stability means that one-year from now a Kuwaiti Dinar will buy roughly the same as it buys today. Strongly rising (inflation) or falling (deflation) prices lead to insecurity and will harm the economy. Hence price stability is a necessary requirement for a healthy economy. Rapidly rising prices ruins our purchasing power. People will start demanding higher wages. Companies will, in turn, factor the higher wages into the prices of their products. The result is a spiral with wages and prices pushing each other up and up while interest rates increase as well.

On the diagram, the increase in demand from AD1 to AD2 has caused the price level to rise. If this continues, then demand-pull inflation is the result. Generally in an economy, the rise in demand comes from a variety of sources: a decrease in taxation, an increase in government expenditure or an increase in consumer expenditure. For example, oil prices would be a perfect example for inflation because they would apply to all the factors mentioned above. Full employment is a state of economy in which all eligible people who want to work can find employment at prevailing wage rates. However, it does not imply 100% employment because grants must...

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...flation also reduces the level of business investment, but also the efficiency with which productive factors are put to use, which causes consequences in achieving economic growth. There is a strong correlation also between inflation and unemployment, which is called the Philips curve. Basically, when there is inflation in the economy, there is a rise in prices, hence there is a fall in the demand of goods and services and the consumers stop purchasing making many workers unemployed (consequence). But since the government wants to pursue it, it would help increase employment and economic growth (vice versa of what is mentioned before).

Looking at the diagram above, as the economy expands beyond the normal output, there is pressure on resources and prices rise. In the long run, the economy cannot be above potential output, so this all becomes an increase in price.