a) The main macroeconomic objectives of a government are price stability, full employment, economic growth and equitable distribution of income. Price stability is a situation in which an economy's prices do not change much over time. Price stability would mean that an economy would experience neither inflation nor deflation. It is of course not common for an economy to experience price stability, as there are always factors that affect it. Consumers and businesses must be able to be assured that inflation is under control. Price stability means that a year from now, a Kuwaiti dinar will buy about the same price as it does today. Sharply rising (inflation) or sharply falling (deflation) prices lead to insecurity and harm the economy. Price stability is therefore a necessary condition for a healthy economy. Rapidly rising prices are ruining our purchasing power. People will start demanding higher wages. Companies will in turn incorporate the higher wages into the prices of their products. The result is a spiral in which wages and prices push each other upward while interest rates also rise. In the diagram, the increase in demand from AD1 to AD2 caused an increase in the price level. If this continues, demand-pull inflation will result. Generally in an economy, the increase in demand comes from various sources: a reduction in taxation, an increase in public spending or an increase in consumer spending. For example, oil prices would be a perfect example of inflation because they would apply to all of the factors mentioned above. Full employment is a state of the economy in which all eligible people who wish to work can find employment at prevailing wage rates. However, this does not imply 100% employment because subsidies must...... middle of paper ...... inflation also reduces the level of business investment, but also efficiency with which factors of production are used, which has consequences for economic growth. There is also a strong correlation between inflation and unemployment, called the Philips curve. Basically, when there is inflation in the economy, there is a rise in prices, therefore a fall in demand for goods and services and consumers stop buying, putting many workers out of work. unemployment (consequence). But since the government wants to continue on this path, this would help increase employment and economic growth (contrary to what was mentioned previously). Looking at the diagram above, as the economy grows beyond normal production, there is pressure on resources and prices rise. . In the long run, the economy cannot exceed potential output, so it all turns into an increase in prices..