Macroeconomic Policies

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Macroeconomic Policies

• Goals of macroeconomic policies
• Fiscal Policies
• Monetary policies
• Supply side policies

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Goals of Macroeconomic Policies

• 1. To achieve the highest sustainable rate of
  long term real gross domestic growth
• 2. Smooth out avoidable business cycle
  fluctuations
• 3.Maintain low levels of unemployment
• 4. Maintain low levels of inflation

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Fiscal and Monetary policies

• Fiscal policy is the use of government budget to
  achieve macro economic objectives.
• Monetary policy is the adjustment of the quantity
  of money in circulation and interest rates by the
  Central bank to achieve macro economic objectives.

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Fiscal...

• Fiscal policy involves the government
  manipulating the level of government expenditure
  and/or rates of taxes to affect the level of
  aggregate demand.
• An expansionary fiscal policy will involve rising
  government expenditure or reducing taxes.
• Deflationary fiscal policy will involve cutting
  government expenditure and/or raising taxes.

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Fiscal.

• Fiscal policy actions can be either automatic or
  discretionary.
• Automatic fiscal policy is a change in fiscal
  policy that is triggered by the state of the
  economy - increasing unemployment and allowances
• Discretionary fiscal policy is a policy action
  initiated by the Chancellor of exchequer
  -increase in defence spending

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Fiscal..

• Before changing government expenditure or
  taxation, the government will need to calculate
  the effect on employment, inflation and national
  income.
• The multiplier is the amount by which a change in
  autonomous expenditure is magnified or multiplied
  to determine the change in equilibrium
  expenditure or real GDP.

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Fiscal..

• For instance, the government purchases multiplier
  is the amount by which a change in government
  purchases of goods and services is multiplied to
  determine the change in equilibrium expenditure
  that it generates.
• Cost inflation If the economy is overheating and
  inflation is rising, the government may raise
  taxes. Although this will lower aggregate demand,
  a rise in taxes will usually be passed on to
  consumers.

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Fiscal..

• Welfare and distributive justice The government
  may want to introduce cuts in public expenditure
  in order to reduce inflation. But these cuts will
  often fall on people who are relatively
  disadvantaged.
• Incentives Discretionary rises in taxes could be
  a disincentive to work.

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Monetary Policies...

• The central bank conducts the nations monetary
  policy, which means that it adjusts the quantity
  of money in circulation.
• The banks goals in its conduct of monetary
  policy are to moderate the business cycle, manage
  and some times defend the exchange rate and keep
  inflation within a specified target.

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Monetary..

• When the bank slows money growth and pushes
  interest rates up, it decreases aggregate demand,
  which slows both real gross domestic product
  growth and inflation.
• When the bank speeds up money growth and lowers
  interest rates, it increases aggregate demand,
  which speeds up real gross domestic product
  growth and inflation.

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Monetary .

• The Central bank can use monetary policy to
  restrict the growth in aggregate demand in one of
  three ways (1) reducing money supply (2) reducing
  the demand for money by raising interest rates(3)
  rationing credit
• Demand side policies can be used to increase the
  actual rate of economic growth if there is slack
  in the economy. In the long term, however,
  economic growth can be increased only if there is
  an increase in the potential rate of economic
  growth. To achieve this the government will
  require supply side policies.

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Supply side..

• Market oriented supply side policies aim to
  increase the rate of growth of aggregate supply
  by encouraging private enterprises and the freer
  play of market forces.
• Reducing government expenditure use of cash
  limits on government departments and local
  authorities, reducing grants and subsidies,
  reducing the number of civil servants,
  reorganisation of public sector

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Supply side.

• Tax cuts To encourage more people to take up
  jobs and people to work longer hours
• Reduction in welfare benefits To encourage
  workers to accept jobs and lower wages and thus
  decrease unemployment.