Discuss in detail the various objectives of macroeconomics policy Essay

Discuss in detail the various objectives of macroeconomics policy explain the costs of failing to achieve those objectives - Essay Example The current global crisis has once again raised the importance of macroeconomic policy to prevent such crisis in future. There has been felt a need to redefine the basic objectives of the macro-economic policy. There is an urgent need for reassessment of macroeconomic policy and theory with a goal to provide a theoretical framework for macroeconomic policy at national and international levels. Consistent high inflation stops the growth of the economy. High inflation leads to increase in interest rates. High interest rates discourage borrowing by consumer (for spending purpose), and companies (for investment purpose). Firms that export will become less competitive. All these factors may lead the economy into a recession. Another aftereffect of high inflation is the redistribution of income from savers to borrowers. This leads to erosion of real value of money. This erosion is good for the borrower, but very bad for the saver. Thus, inflation is a harmful occurrence for the savers. This hurts the economy in the long-run as investment in an economy is majorly dependent on the amount of savings. If the inflation rate is higher than the interest rate in economy, the savers receive a negative real (inflation-adjusted) interest rate. High inflation is accompanied by variable inflation, leading to unstable prices. This forces the manufacturers to continually change their menus, price, machines, supply systems, etc. This cost is called as the ‘Menu Costs’. Inflation is generally measured as the rate of change in the Retail Price Index (RPI). Many Governments such as that of UK focus on the annual percentage change in RPIX, which is housing costs removed from RPI. Another rate of interest is the Consumer Price Index This is an important objective that any macroeconomic policy should try to achieve. High growth in GDP leads to improvement in the living standards. But, an important point that