MONETARY POLICY
MACROECONOMIC POLICY
In a market economy (where the interaction between demand and supply is the primary instrument for
solving the economic problem of scarcity), the market is not always successful in solving the scarcity
problem efficiently. Market failures occur and this is why the government partakes in the economy (with
policy) attempting to achieve certain macroeconomic objectives.
These objectives can be divided into two broad groups, namely those aimed at the stabilisation of economic
activity and those aimed at structural objectives.
Stability Objectives Structural Objectives
- Internal price-level stability: - The expansion of the economy's productive
and employment capacity
• Stability in the value or purchasing power of
money (a low inflation rate). • (in contrast with stabilisation objectives aimed
- Financial stability: stability of the financial sector at removing the cyclical instability in economic
(financial institutions and financial markets) activity and employment). In other words, this
refers to the long term trend rather than the
- Balance of payments equilibrium and short term fluctuations around that trend.
exchange rate stability:
- An equitable distribution of income and wealth
• Imply the avoidance of chronic deficits in the in the economy.
balance of payments and the prevention of
excessive fluctuations in the exchange rate of • This objective involves an attempt to eliminate
the national currency. an excessively skew distribution of income and
wealth - a situation in which a small percentage
- Stability of income and employment within the of the total population earns a large proportion
context of the business cycle: of aggregate income or owns a large proportion
• The restriction of over- and under employment of the wealth.
of factors of production as a result of the
cyclical upswings and downswings in economic
activity.
To achieve these objectives, the government makes use of policy instruments. Monetary policy is one such
instrument
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MACROECONOMIC POLICY
In a market economy (where the interaction between demand and supply is the primary instrument for
solving the economic problem of scarcity), the market is not always successful in solving the scarcity
problem efficiently. Market failures occur and this is why the government partakes in the economy (with
policy) attempting to achieve certain macroeconomic objectives.
These objectives can be divided into two broad groups, namely those aimed at the stabilisation of economic
activity and those aimed at structural objectives.
Stability Objectives Structural Objectives
- Internal price-level stability: - The expansion of the economy's productive
and employment capacity
• Stability in the value or purchasing power of
money (a low inflation rate). • (in contrast with stabilisation objectives aimed
- Financial stability: stability of the financial sector at removing the cyclical instability in economic
(financial institutions and financial markets) activity and employment). In other words, this
refers to the long term trend rather than the
- Balance of payments equilibrium and short term fluctuations around that trend.
exchange rate stability:
- An equitable distribution of income and wealth
• Imply the avoidance of chronic deficits in the in the economy.
balance of payments and the prevention of
excessive fluctuations in the exchange rate of • This objective involves an attempt to eliminate
the national currency. an excessively skew distribution of income and
wealth - a situation in which a small percentage
- Stability of income and employment within the of the total population earns a large proportion
context of the business cycle: of aggregate income or owns a large proportion
• The restriction of over- and under employment of the wealth.
of factors of production as a result of the
cyclical upswings and downswings in economic
activity.
To achieve these objectives, the government makes use of policy instruments. Monetary policy is one such
instrument
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