Coursework Example | Topics and Well Written Essays - 1250 words - 2

Coursework Example The government also wants that the economy function at the full employment level, so that all the people who are capable and willing to work would be able to attain a job, however the natural rate of unemployment will never be zero due to seasonal, structural and other reasons. (McConnell & Brue, 1996) Zero inflation is considered bad for the economy; however, the inflation rate shouldn’t be too high or even too low in the economy and shouldn’t change rapidly. The government wants to sustain the inflation at a moderate and sustainable level. The prices and accordingly the demand of goods and services will vary according to the price level and therefore it is important that the general price level remain stable in the economy. Lastly, the government also aims at keeping their finances sound as well as the balance of payments account. (McConnell & Brue, 1996) However it is difficult to classify the objectives in order of their importance. And this makes the task of the go vernment difficult due to clashing objectives and a tradeoff needs to be made. Such as a policy that would perhaps stimulate overall demand or aggregate demand in the short run may reduce unemployment but that may increase inflation in the long run and go against the government’s objective of maintaining moderate inflation rate. This may also lead to a worsening of the balance of payment position and the government needs to make a choice as to what is more important. At the same time, growth and inflation are considered to be of utmost importance because growth is what improves the standard of living for people and controlling inflation also leads to general price levels being stable and thus attaining the goal of sustainable growth. Inflation is supposed to be the most important goal to achieve since it is believed that the other aims would be difficult to achieve in the long run if the sustainable inflation rate is missed. (McConnell & Brue, 1996) Governments can employ two policies in times of a recession, that is, a decline in GDP as well in times of expansion, that is, a rise in the GDP level. And these are: fiscal and monetary policies. Fiscal policies involve government expenditure and taxes to increase or decrease the economic activity. There are two types of fiscal policies: contractionary and expansionary fiscal policies. Contractionary fiscal policy is when the government spends less that the tax revenue, that is, the taxes are higher and government spends less on the economy to finance their debt. They also try to increase public sector borrowing requirement. An expansionary fiscal policy is used to expand the economy when it is in recession by the government spending increasing and a reduction in taxes. This leaves people with more disposable income and consumption and spending in the economy increases overall. The figure for an expansionary fiscal policy is shown below: A situation where G=T is one where the overall tax revenue funds the o verall government spending and this is called a neutral fiscal policy and is applied in an economy which is in equilibrium. Fiscal policies can help with the objectives of achieving a stable growth rate, full employment and price stability. However, government spending and borrowing can also lead to high interest rates, and when a debt is incurred, it may need to be facilitated from overseas, monetization or public borrowing. This can actually