One of the questions central banks are asked all the time is what are the macroeconomic goals of their actions. The responses they give range from maintaining healthy levels of inflation to increasing market value of the currency of a country. The fact is, any goal other than inflation and market value of a particular currency would be considered as being micro economic in nature. Let us just say you are the central bank of the United States and you want to raise the inflation rate to 2%. You could achieve this by either raising the interest rates, changing the level of reserve balances or even buying more Treasury Bonds to raise the economic growth.
The latter two options are obviously wrong, if the general price level is on a decreasing trend. What you need is a strategy that would help you achieve both inflation and price level acceleration. This can be achieved by targeting four different components of inflation. Let's see how these four components affect the macroeconomy.
The first component of the macroeconomic goals is raising the spending power of the average citizen. This is primarily achieved by enhancing the demand management capacity of the public. In other words, consumers are spending their money so as to have higher living standards. Inflation will only go up if not replaced with a decent living standard. That is the reason why a good rule of thumb for spending is to purchase only what you need rather than splurge unnecessarily.
The second component of the macro objectives is the level of inflation of the gross domestic product or G DP. The level of inflation is determined by various factors such as economic growth, availability of capital, the level of trade and interest rates. It is the goal of the central bank to keep the average level of GDP at a consistent level with the inflation target. The ideal scenario would be that the economy stays at the level of the inflation target as long as it takes to bring back the real value of money. The central banks thus try to stabilize the trade deficit as well as the general price level through regulating the interest rates to bring down the level of inflation.
The third component of the macro objectives is raising the living standards of the people who comprise the workforce. This can only be achieved if proper measures of fiscal policy are put into practice to augment the demand in the market and decrease the supply of goods and services. Inflationary pressures are therefore only manageable through appropriate monetary policies such as interest rate level cuts and monetary injections to increase the level of spending power of the people. Inflation can only be . . . . . . successfully controlled to a certain extent through the interest rates or through tax increases to fund necessary infrastructure development projects.
The fourth component of the macro objectives is raising the level of employment. The size of the labor force and the quality of its distribution affect the economic growth of the nation. If the employment rate rises to a level that is conducive to raising the living standards of the people, the purchasing power of the currency thus grows. If growth is only limited to a particular area or level, say the urban population, then targeting the suburbs for expansion is a good idea.