a) The main macroeconomic objectives of a government are price stability, full employment, economic growth and an equitable income distribution. Price stability is a situation in which prices in an economy do not change much over time. Price stability would mean that an economy would not experience inflation or deflation. Of course it is not common for an economy to have price stability, as there are always factors that influence it. Both consumers and businesses need to be able to have confidence that inflation will be kept under control. Price stability means that a Kuwaiti dinar will buy roughly the same amount a year from now as it does today. Sharply rising (inflation) or falling (deflation) prices lead to insecurity and damage the economy. Therefore price stability is a necessary requirement for a healthy economy. Rapid price increases ruin our purchasing power. People will start demanding higher wages. Companies, in turn, will factor higher wages into the prices of their products. The result is a spiral in which wages and prices push each other higher and higher while interest rates also rise. In the diagram, the increase in demand from AD1 to AD2 caused the price level to increase. If this continues, the result will be demand-driven inflation. Generally in an economy, increased demand comes from several sources: a decrease in taxation, an increase in government spending, or an increase in consumer spending. For example, oil prices would be a perfect example of inflation because it would apply to all the factors mentioned above. Full employment is a state of the economy in which all eligible people who wish to work can find work 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 the efficiency with which production factors are used, which causes consequences in achieving of 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 an increase in prices, therefore there is a decline in demand for goods and services and consumers stop purchasing making many workers unemployed (consequence). But since the government wants to pursue it, it would help increase employment and economic growth (vice versa of what was mentioned before). Looking at the diagram above, when the economy expands beyond normal production, there is pressure on resources and prices rise. . In the long run, the economy cannot run above potential production, so all of this results in rising prices.