Under this unit macroeconomic policy objective, instruments (tools) and targets 
are explicitly explained to the student understanding. It is however, expected of 
the students to be able to adjust any of the macroeconomic variables to achieve 
a given macroeconomic objective.
This unit will enable the student to:
i) Differentiate between macroeconomic policy objectives, targets, and instruments.
ii) Use a set of instruments to align a target and achieve a given objective. 
iii) Differentiate between monetary and fiscal policy instruments and targets.
iv) Annex macroeconomic objectives from monetary and fiscal point of view.

The Macroeconomic Policy Objectives

a) Full employment

Full employment has been ranked among the foremost objectives of economic
policy. But there is no unanimity of views on the meaning of full employment. 
Prof. Ackley regards it as a ―slippery concept.‖ But the credit of popularizing 
goes to Keynes, and since the Second World War it has been accepted as one of 
the important goals of macro economics policy.
The classical economists always believed in the existence of full employment in 
the economy. To them full employment was a normal situation and any deviation from this was regarded as something abnormal. According to pigou, the tendency of the economic system was to automatically provide full employment in the labour market. Unemployment was a normal situation and any deviation from this was regarded as something abnormal. According to pigou the tendency of the economic system was to automatically provide full employment in the labour market, employment resulted from rigidity in the wage structure and interference in the working of market system in the form of trade union legislation, minimum wage legislation, etc. full employment existed 
when everybody who are the running rate of wages which‘s to be employed. 
Those who are not prepared to work and the existing wage rate are not unemployed in the pigovian sense because they are voluntarily unemployed. 
However, no possibility of involuntarily unemployment in the sense that people 
are prepaid to work but they could not find work. According to pigou, with perfectly free completion- there will always be at work a strong tendency for wage rate to be so related to demand that everybody is employed‖. However, the classical view of full employment is consistence of the sum amount of frictional, voluntary, seasonal, and structural.
According to Keynes, full employment means the absence of involuntary unemployment. In other word, full employment is a situation in which 
everybody who wants to work gets work. Full employment so defined is consistent with frictional and voluntary unemployment. Keynes assumed that 
with a given organization, equipment and techniques, real wages and the 
volume of out-put (and hence of employment)are uniquely co-related, so that, in general an increase in employment can only occur to the accompaniment of 
a decline in the rate of wages. Thus the problem of full employment is one of 
maintaining adequate effective demand Keynes gave an alternative definition of 
full employment at another place in his general theory thus: ―it is a situation in 
which aggregate employment is inelastic in response to an increase in the effective demand for its out-put. ―It means that the test of full employment is when any further increase in effective demand is when increase in effective demand is not accompanied by any increase in output. Since the supply of output becomes inelastic at the full employment level, any further increase in effective demand will lead to inflation in the economy. Thus the Keynesian concept of full employment involves three conditions (i) reduction in the real wage rate; (ii) increase in effective demand; and (iii) inelastic supply of output at the level of full employment.
According to Professor W.W. Hart attempting to define full employment raises many people‘s blood pressure. Right so because there is hardly any economist 
who does not define it in his own way. Lord Beveridge in his book full employment in a free society defined it as a situation where there was more vacant job than unemployed men so that normal lag between losing one job and finding another will be very short. By full employment he does not mean zero 
employment which means the full employment is not always full. There is 
always a certain amount of frictional in the economy even when there is full 
employment. He estimated frictional unemployment of 3% in a full employment situation for England. But his pleading for more vacant jobs than the unemployed cannot be accepted as the full employment level. According to the America economic association committee, ―full employment is a situation where all qualified person who want job at current wage rate find full-time jobs.‖ It does not mean unemployment is zero. Here again like Beveridge, the committee considered full employment to be consistent with some amount of unemployment.

b) Price stability or low inflation

One of the policy objectives of monetary and fiscal policy are to stabilise the price level. Both economists and payment favour this policy because fluctuations in prices bring uncertainty and instability to the economy. Rising and falling prices bring uncertainly and instability to the economy. Rising and falling prices bring uncertainty and instability to the economy. Rising and falling prices are both bad because they bring unnecessary loss to some and undue advantage to others. Again they are associated with business cycles. So a policy of prices stability keeps the value of money stable, eliminates cyclical fluctuations, brings economic stability, helps in reducing inequalities of income and wealth, secures social justice and promotes economic welfare.
However, there are certain difficulties in pursuing a policy of stable price level. 
The first problem relates to the type of price level to be stabilised. Should the 
relative or general price level be stabilised, or the wholesale or retail of consumer goods or producers goods? There is no specific criterion with regards to the choice of a price level which would include consumers‘ goods prices as well as wages.‖ but this will necessitate change in the quantity of money and not by as much as is implied in the stabilisation of consumer‘s goods price.

c) Economic Growth and Development

One of the most important objectives of macroeconomics policy in recent years
has been the rapid economic growth of an economy. Economic growth is defined as ―the process whereby the real per capital income of a country increases over a long period of time.‖ economic growth is measured by the increase in the amount of goods and services produced in a country. A growing economy produces more goods and services in each successive time period. 
Thus growth occurs when an economy‘s productive capacity increases which, 
in turn, is used to produce more goods and services. In its wider sense, economic growth implies raising the standard of living of the people, and reducing inequalities of income distribution. All economists agree that economic growth is a desirable goal for a country. But there is no agreement over for instance the annual growth rate which an economy should attain.

d) Balance of Payment Equilibrium

Another objectives of macroeconomic policy since the 1950s has been to
maintain equilibrium in the balance of payments. The achievement of this goal 
has been necessitated by the phenomenal growth in the world trade as against
the growth of international liquidity. It is also recognised that deficit in the
balance of payment will retard the attainment of other objectives. This is 
because a deficit in the balance of payment leads to sizeable outflow of gold. 
But it is not clear what constitute a satisfactory balance of payment position 
but clearly a country with a net debt must be at a surplus to repay the debt over 
a reasonably short period of time. Once any debt has been repaid and an adequate reserve attain, zero balance maintenance over time would meet the policy objective.

e) Equitable Income Redistribution

Generally, market system does not distribute income equitably because through this system country productive resources are just distributed to where they are mostly needed (efficient and effective distribution) without considering what happen to the rest of the economy. The result of this is the skewness in national resources distribution. To correct for this defect, government need to step-in using mainly fiscal policy to redistribute income in order to promote general 
well being by using the tax instrument to collect from those who earn more and 
give to those that earn less through provision of social safety net..

Self Assessment Exercise:
i. List and explain macroeconomic policy objectives known to you


This is divided into namely;
A) The Monetary Policy Instruments and, 
B) The Fiscal Policy Instruments.

A) The Monetary Policy Instruments.

There are basically two types of monetary instruments namely: Direct and Indirect

 Direct monetary policy instruments is characterized by the use of: 

Credit ceiling, sectoral credit allocation, administrative control of interest and 
exchange rates, Moral suasion, movements of governments account in and out of the DMBs, issuance of stabilization securities etc. while

 Indirect Monetary Policy Instruments 

are market-based instruments and 
therefore, require a well developed and functional financial market. These 
Instruments include Open Market Operations, Liquidity Ratios, Cash 
Reserve ratios, Discount window operations, Expanded Discount Window 
operations (EDW) –Dec 2008 – Jul. 2009, Minimum Rediscount Rate MRR- up to Dec. 2006, Monetary Policy Rate – Dec 2006 to date

B) The Fiscal Policy Instruments –

The budgetary tools are basically the fiscal instruments. As defined earlier 
budget is an annual financial statement of government expected revenue and 
proposed expenditures. Like monetary policy, fiscal policy could be expansionary or contractionary both are referred to as discretionary policy. 
Taxation imposition and government spending are basically fiscal policy instruments. A reduction in tax couple with a ‗fat’ government spending imply 
an expansionary fiscal policy , the opposite is contractionary fiscal policy. 
These policies are applicable to different macroeconomic situations.

Self Assessment Exercise:
i. Give a solution to inflation using both fiscal and monetary policy
ii. Which of the tools you used above is most potent and why?

The Macroeconomics Policy Targets.

The policy targets are the specific values which a government attaches to its 
various objectives of macroeconomics policies. For instance, the government 
may have the following policy objectives: (1) to achieve full employment at the 
rate of 3 per cent unemployment; 
(2) to achieve price stability at annual inflation rate of 5 per cent per annum; and 
(3) to attain the growth rate of 5 per cent per annum for the economy. Thus the policy targets of the government are 3 per cent unemployment rate, 5 per cent inflation rate and 5 per cent growth rate per year. 
On the other hand, policy instrument are those exogenous variables that can be 
directly influenced by the government. The government can influence macroeconomic policies by such instruments of monetary policies as bank rate, changes in reserve ratios, open market operations, selective credit controls, etc. 
similarity; it can use such fiscal policy instruments as tax rates, budgetary policy, 
compensatory fiscal policy, etc.

Self Assessment Exercise
i. Explain in details the macroeconomic targets.
ii. Differentiate between macroeconomic policy targets and objectives

Conflict or Trade-Off in Policy Objectives

The five policy objectives discussed above are not always complementary to 
one another but rather, they conflict. If a government tries to fulfil one 
objective, some other moves away. It has to sacrifice one objective in order to 
attain the other. It is, therefore, not possible to fulfil all these policy objectives simultaneously. The different policy objectives are:

 Full Employment and Economic Growth

The majority of economic hold the view that there is no inherent conflict
between full employment and economic growth. Full employment is consistent 
with 4 percent unemployment in the economy, so the relationship between full 
employment and growth. Period of high growth are associated with low level of 
unemployment and period of low growth with rising unemployment.

 Economic Growth and Price Stability

There is conflict between the goals of economic growth and prices stability.
The rise in prices is inherent in the growth process. The demand for goods and 
services rises as a result of steeping up of investment on a large scale and 
consequent increase in incomes, this leads to inflationary rise in prices 
especially when the level of full employment is reached. In the long run, where new resources are developed and growth leads to the production of more 
commodities, the inflationary rise in prices will be checked. But the rise in prise 
will be there with the growth of the economy and it will be moderate and 

 Full Employment and Price Stability

One of the objectives of macroeconomics policy in the 1950s was to have full
employment with price stability. But the studies of Philips, Samuelsson, Solow 
and others in the 1960s established a conflict between the two objectives. These finding are explained in term of Philip curve. They suggest that full 
employment can be attain by having more inflation and that price stability can be achieved by having unemployment to the extent of 5 to 6 per cent.

 Full Employment and Balance of Payment

There is a major policy conflict between full employment and balance of payment. Full employment is always related to balance of payment deficit. In fact, the problem is one of maintaining either internal balance or external balance. If there is a balance of payment deficit, then a policy of reducing expenditure will reduced import but it will lead to unemployment in the country. If the government raises aggregate expenditure in other to increase employment, it will increase the demand for imports thereby creating disequilibrium in the balance of payments. It is only when the government 
adopts expenditure –switching policies such as devaluation that this conflict can 
be avoided but that too temporarily  Price Stability and Balance of Payments.
There appears to be no conflict between the objectives of price stability and 
balance of payment in a country. Fiscal and monetary policies aim at controlling inflation to discourage imports and encourage exports and thus they
help in attain balance of payment equilibrium. However, if the government tries to remove unemployment and allow some inflation within the economy, there 
will discourage exports and encourage imports, thereby leading to disequilibrium in the balance of payment. But this may not happen if prices also rise by the same rate in other countries of the world.

Self Assessment Exercise
i. Enumerate and explain macroeconomic policy objectives
ii. Why is achievement of price stability seldom lead to unemployment?
iii. Examine the relationship between price stability and balance of payment


This unit explores the macroeconomics situation and reflect on the policy frame
work, policy objectives, and targets and conclude that for macroeconomic 
stability, application of both fiscal and monetary policy is the panacea.


The unit survey macroeconomic environment which necessitates discussion on macroeconomics policy framework - policy objectives, instrument, targets and strategies. We equally examined the trade off that existed among macroeconomic policy objectives because achieving the five goals simultaneously is not economically possible considering the policy instruments at the disposal of 
economic manager. The students were made to know that policy is applied in an 
economic discretionally –having to do with the current situation which could be 
expansionary or contractionary.

Marked Assignment

i) What are macroeconomic policy objectives?
ii) Discuss conflicts that exist among various macroeconomic objectives.
iii) Distinguish among macroeconomic policy objectives, instruments and targets 
iv) Write short note on the following;
a. Direct monetary policy instruments 
b. Indirect monetary policy instruments
c. Contractionary fiscal policy
d. Contractionary monetary policy 
e. Expansionary policy
v) Proffer policy recommendation(s) for an economy with chronic inflation and  adverse balance of payment problems. 

References/Further Readings

Attah B.O, Bakare, T.A. & Daisi, O.R., (2011); Anatomy of Economics 
Principles, Q&A (Macroeconomics), Raamson Printing Press, Oke-Afa, Isolo, 
Lagos, Nigeria
Amacher, R and Ulbrich, H, (1986); Principles of Economics, South Western
Publications Co. Cincinnafi, Oliso
Bakare –Aremu T.A, (2013); Fundamental of Economics Principles (Macroeconomics), Raamson Printing Press, Oke-Afa, Isolo, Lagos, Nigeria
Bakare I.A.O, Daisi, O.R., Jenrola, O.A., & Okunnu, M.A., (1999): Principles and Practice of Economics (Macro Approach), Raamson Printing Press, Mushin, Lagos, NigeriaDennis R. A. et-al; International Economics, Mcgraw 
Hill Irwin, 8th edition.
Familoni K.A, (1990); Development in Macroeconomics Policy, Concept
Publications, Lagos, Nigeria
Fashina E.O, (2000); Foundations of Economics Analysis (Macro Theories),
F.E.F International Company, Ikeja, Lagos, Nigeria
Jhingan M.L, (2010); Macroeconomics Theory, 12th edition, Vrinda
Publications (P) Ltd. Delhi, India
Jhingan M.L, (2010); International Economics, Vrinda Publications (P) Ltd. 
Delhi, India
Lipsey R.G, (1979); An Introduction to Positive Economics, Hayper & Raw, 
Umo J.U, (1986); Economics; An African Perspectives , Johnwest, Lagos Nigeria.
Gordon Robert J. (2009). Macroeconomics(Eleventh ed.). Boston: Pearson
Addison Wesley. ISBN 9780321552075

Post a Comment