Conflictsbetween Government’s Macroeconomic Objectives
Thegovernment aims at achieving its main economic objectives andmaintains the economic growth balance of the economy. The governmenttherefore implements some policies that involve monetary and fiscaltools as a way of shaping the economy towards the achievement ofthese goals. However, some objectives conflict with other goals orintentions of the government. The achievement of one objective limitsthe achievement of the other, or limits the operational capacity ofother economic sectors.
Thispaper will explore these conflicts with a view of understanding themand expressing the best policy or mixture of policies to manage theconflicts.
Thispaper will achieve this by discussing the main objectives of thegovernment. Within this discussion, additional objectives of thegovernment will be explained.
Thispaper also discusses the conflicts between the explained governmentobjectives. Each of the discussion of the conflict will carry theexplanations of the best policies that can manage the conflicts.
Anygovernment works to achieve four main macroeconomic objectives. Theyare full employment, balance of payment equilibrium, price stabilityand high sustainable rate of economic growth (Prachowny,2012). Themain macroeconomic objectives of the government attract otheradditional objectives that subsequently achieve the macro-economictargets. They include achievement of low inflation rates, equality inthe distribution of income, environmental conservation in a balanceduse of natural resources for economic growth (Heijdra& Ploeg, 2002).
Achievementof full employment or low unemployment aims at ensuring that thepopulation is actively engaged in productive and income-generatingwork. Low unemployment aims at ensuring that those without work andare willing and able to work do not miss opportunities, and it ifthey do, it is at minimum levels (Heijdra& Ploeg, 2002).
Thebalance of payment equilibrium aims at maintaining a favorablebalance between the country’s total payments and receipts at theinternational level (Mankiw,2014).This ensures that the country pays less than it receives in totalityregarding the international transactions. Therefore, the country willtry to avoid BOP deficits by increasing exports and foreigninvestments.
Pricestability aims at maintaining the general price level of products inthe economy at affordable levels. This objective attracts anotherobjective of achievement of low inflation rates in the economy.According to Dwivedi(2001), thegovernment aims at achieving price stability by controlling the rateof inflation that prevails in the economy at very low levels. Thegovernment does this by implementing both monetary and non-monetarypolicies.
Achievementof a healthy economic growth is an objective that entails attainmentand maintenance of a high, but sustainable economic growth rate(Dwivedi,2001).This means that the government works towards increasing the economicgrowth but considerate of the ability and capacity of the economy aswell as economic resources. This objective is closely associated withthe additional objective of maintaining equality in the distributionof income (Prachowny,2012). Italso attracts the objective of environmental conservation as thegovernment seeks not to deplete its natural resources for economicgrowth.
Theconflict betweenthe macroeconomic objectives
Itis practically impossible to achieve all these targets and objectivesat once without conflicts between them. Therefore, they are achievingat their optimum levels, which is the level that best suits theeconomy while maintaining other objects at acceptable levels.
Healthygrowth and low inflation
Ifthe government achieves this target and the economy too highly, theeconomic consequence will be increased consumption. This is becauseconsumers will have adequate disposable income to consume, which canlead to excessive consumption within the economy (Snowdon& Howard, 2005).This will lead to increased demand that the country’s supply cannothandle. As a result, prices will tend to rise and inflationarypressure will be exerted on the economy. As a consequence, themacroeconomic objective of attaining low inflation is not achieved.As the economic growth rate increases, the inflation rate tends toincrease, and away from the intended levels.
Managementof this conflict
Thebest policy is using incentives to encourage production in theeconomy through increased investments in the economy. This will helpthe economy to produce more goods and services that will allow themarket to stabilize its prices through the adoption of the marketforces of demand and supply (Blanchard,2011).This means that the government will have to adopt another policy ofliberalization of the market in order to set the market environmenthealthy for demand and supply forces. The combination of thesepolicies will significantly allow demand and supply to influence theachievement of optimum level of inflation as the economy grows withthe addition to the adopting monetary policies manage theinflationary levels in the economy.
Fullemployment and low inflation
Theachievement of full employment is the most challenging objectivebecause it affects several other aspects of macroeconomic objectives.The most notable conflict is with the inflationary pressures. Toachieve high employment or low unemployment levels, the government isforced to reduce interest rates and increase its spending (Prachowny,2012). Theresulting reduction in unemployment levels leads to increase in wagerates. This is because labor supply reduces in the labor market,which makes employers try to attract workers by increasing wages andsalaries (Sullivan& Sheffrin, 2003).Consequently the cost of production increases for the employees,thereby necessitating the increase in the prices of goods andservices. As the employers seek to cover for the increased cost ofproduction by increasing prices, the inflation rates in the economyshoot up.
Ina similar way, the reverse to this scenario leads to a conflict. Thegovernment can try to reduce high inflation rates by the monetarypolicies of reducing public spending and lowering interest rates.This will result to reduced consumption in the economy as consumershave lesser income and money supply is low (Prachowny,2012). Consequently,manufacturers will have to lay some workers off, as they reduceproduction, since the demand in the market is low. This leads tojoblessness.
Managementof this conflict
Thebest policy is maintenance of optimum levels of inflation as well asoptimum levels of unemployment. There can never have a lever wherethe employment in the economy will be at full capacity. At the sametime, the economy cannot achieve total zero inflation rates (Sullivan& Sheffrin, 2003).The two much have an optimum balance. Therefore, the government canadopt a policy of consistently updating its employment-inflation,balance by regularly reviewing monetary policies to ensureachievement of this balance on an annual basis (Gartner,2006).It will be like a regular payment of a price for low inflation rates.This is because some level of unemployment is a default price thateconomies pay for low inflation.
Healthygrowth and balance of payments equilibrium
Ifthe economy grows and the rate of economic growth increases sharply,consumer will have a tendency to consume more. Their spending shotshighly, which gives them the ability and need to buy goods andservices from other countries (Gupta,et al, 2008).Consequently, the total imports of a country will increase, asconsumers can afford their preference of foreign goods to localproduction. The increase in imports reduces the country’s balanceof trade (BOT), which negatively affects the balance of payment(BOP). If the country’s imports are lower, relative to exports,then the country will experience a BOT deficit.
Furthermanagement of this conflict leads to further conflicts within the twoobjectives. Worse still, the conflict of the two objectives draws theeconomic wrath of inflationary pressure, thereby inviting a thirdconflict in the form of low inflation objective. First, thegovernment can decide to devalue the currency as a way of fixing theBOP (Gartner,2006).This makes imports expensive and exports cheaper. As a result, pricesof all the imported goods and services increase, thereby causinginflationary pressure.
Ifthe government employs the import control mechanism of using hightaxes and tariffs, the resulting consequence is the passage of thesecosts to local consumers by importers (Gupta,et al, 2008).This will increase the local prices and will cause an inflationarypressure in the economy. In addition, the use of import control canmake the country conflict with other countries in case of agreementsin trading blocs.
Themost appropriate policy is the government controlling is balancedmonetary supply in the economy through taxes and government spending.This will lead to a reduction in the levels of consumer spending tooptimum capacity. The optimum capacity of consumption is a level thatwill limit consumers’ ability to import excessively, withoutaffecting their local consumption at the same time (Abel& Bernanke, 2005).This is sensitive to the government since consumers will still needimports while some will not be able to afford local consumption.Therefore, the government requires adopting other policies ofcontrolling imports as well as price levels.
Healthygrowth and equality
Ifthe economy achieves increased economic growth, the production in theeconomy increases. This production means that the areas with higherendowment in natural resources will experience higher growth in theeconomy. This inequality will also leave the people who control suchresources with higher income, leading to unequal distribution ofresources (Blanchard,2011).In addition, high economic growth may lead to over-utilization ofeconomic resources of the country, thereby depleting the environment.
Thebest policy of managing this conflict is equal distribution ofgovernment spending and government allocation of its resources. Thiscan be achieved by establishing equitable tax regimes that aim attransferring incomes from high-growth areas to low economicallydeveloped regions (Abel& Bernanke, 2005).This will allow the government to develop the economy in a balancedmanner that result in equal distribution of resources and incomesthat relate to economic growth.
Thegovernment’s objectives are to achieve full employment, stableprices, BOP equilibrium and healthy economic growth, as the maineconomic objectives. While the government works to achieve theseobjectives, conflicts arise in the process. The conflicts are causedby the impossibility of achieving the objectives at full capacitywithout affecting the achievement of the other objectives. While allthese objectives conflict, governments should employ appropriatemeasures and policies that will manage or minimize the conflicts.Therefore, the conflicts cannot be solved. The government can onlyachieve these objectives at optimum levels that make the economy growat balanced levels.
Abel,A., & Bernanke, B. (2005). Macroeconomics(5th ed.).New York: Pearson
Blanchard,O. (2011). MacroeconomicsUpdated (5th ed.). EnglewoodCliffs: Prentice Hall.
Dwivedi,D.N. (2001). Macroeconomics:Theory and policy. NewDelhi: Tata McGraw-Hill
Gartner,M. (2006). Macroeconomics.New York: Pearson Education Limited
Gupta,K. R., Mandal, R.K. & Amita G. (2008). Macroeconomics. New Delhi: Atlantic Publishers & Dist
Heijdra,B. J., & Ploeg, F. (2002). Foundationsof Modern Macroeconomics,Oxford: Oxford University Press
Mankiw,N. G. (2014). Principlesof Economics.Stanford: Cengage Learning
Prachowny,M. (2012). TheGoals of Macroeconomic Policy.New York: Routledge
Snowdon,B., & Howard R. V. (2005). ModernMacroeconomics: Its Origins, Development And Current State,New York: Edward Elgar Publishing
Sullivan,A., & Sheffrin, S. M. (2003). Economics:Principles in action.Upper Saddle River, New Jersey: Pearson Prentice Hall