Governments use fiscal, monetary and supply-side policy to pursue three macroeconomic objectives at AS Level: price stability, low unemployment and economic growth. (Policy conflicts and trade-offs are not required at AS.)
| Objective | Definition and measure | Policy tools |
|---|---|---|
| Price stability | A low and stable rate of inflation; the price level rises slowly and predictably. Measured by the CPI. India's RBI targets inflation of 4% with a tolerance band of ±2% | Monetary: raise interest rates to cool demand. Fiscal: cut spending or raise taxes to reduce demand- pull pressure. Supply-side: raise productivity and cut costs (shift AS right) to ease cost-push pressure |
| Low unemployment | Minimising involuntary unemployment: people willing and able to work who cannot find a job. Measured by the labour force survey (ILO) or claimant count | Fiscal: higher government spending or lower taxes raise AD (cyclical). Monetary: lower interest rates raise borrowing and spending. Supply-side: training, job information, flexible labour markets (structural and frictional) |
| Economic growth | An increase in real GDP over time. Actual growth is a rise in output towards potential; potential growth is a rise in productive capacity (LRAS shifts right). Measured by % change in real GDP and real GDP per capita | Fiscal: infrastructure spending and tax incentives. Monetary: lower interest rates raise consumption and investment. Supply-side: education, infrastructure, R&D, deregulation |
Why they matter: unstable prices erode savings, distort business planning and hit fixed-income households hardest (inflation acts like a regressive tax). Unemployment wastes resources, lowers tax revenue, raises welfare spending and is linked to poverty. Growth raises incomes, funds public services through higher tax revenue and can reduce poverty, but must be sustainable.