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15.1 The Goals of Economic Policy

By using the tools of economic policy effectively, the government can do much to enhance the living standard of all Americans. Stable prices, full employment and economic growth are the important policy goals of the federal government.

15.1a Stable prices

The government has the power to stabilize the economy and thus improve and safeguard the economic status of individual Americans. Inflation occurs when there is a sharp increase in the prices of goods and services, reducing the value of money. Thus more money has to be spent to buy the same goods. By keeping inflation under control, prices can be maintained at the same level. However prices can be affected by circumstances beyond the governmentís control. For instance, a drought can create shortages, leading to higher prices. The aim of anti-inflationary measures is to prevent money expenditure on goods and services from rising at a faster rate than the availability of supplies.

15.1b Full Employment

People either leave their jobs or are not able to work for several reasons. Thus, it is not possible to achieve a state of full employment. When the unemployment rate is four percent or less, the situation may be considered as full employment. There are variations in the unemployment rate in different regions and states.

15.1c Economic Growth

Economic growth is measured by means of the Gross National Product (GNP) that is the value of goods and services produced within a year. In a flourishing economy, the GNP growth rate may be four percent a year, while the growth in a stagnant economy may be less than one percent. High unemployment and low productivity characterize a stagnant economy. In such a situation it is difficult to find jobs. A strange combination of high unemployment and high inflation, known as stagflation. This occurred in the U.S. during the 1970s.

The federal government also aims at achieving low or stable interest rates, a balanced budget (or at least one with a reduced deficit from the previous one) and a trade balance with other countries. Thus it aims at maintaining a sound economic policy.


15.0 - Introduction
15.1 The Goals of Economic Policy
15.2 Theories of Economic Policy
15.3 The Federal Budget
15.4 Taxation and Spending
15.5 International Economic Policy

Chapter 16

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