Macroeconomic aims
Governments set goals for the whole economy. The four main macroeconomic aims are usually: steady economic growth, low unemployment, low and stable inflation (stable prices), and a healthy balance of payments on international trade. Some governments also aim to reduce poverty and share income more fairly.
Remember
- Aims can conflict: fast growth may cause higher inflation.
- Trade-offs mean a government cannot always achieve every aim at once.
What is fiscal policy?
Fiscal policy is the use of government spending and taxation to influence the economy. A direct tax is charged on income or profits, such as income tax. An indirect tax is charged on spending, such as a sales tax added to goods.
Expansionary and contractionary policy
Expansionary fiscal policy means higher government spending and/or lower taxes. This raises total demand in the economy, which can reduce unemployment and boost growth, but may increase inflation. Contractionary fiscal policy means lower spending and/or higher taxes, which reduces demand and can help control inflation, but may slow growth.
Example
During a recession, a government may cut income tax and increase spending on roads and schools to encourage spending and create jobs.