Macroeconomic Policy

Macroeconomic policy refers to the government's actions to regulate a nation's economic operations that support robust and sustained economic growth, which is essential for raising living standards, creating jobs, and creating wealth. The three primary macroeconomic concerns are national production, unemployment, and inflation. These are components that can be modified with the use of macroeconomic policies.

In addition, macroeconomic policy, which includes fiscal policy and monetary policy, may be used by governments to help stabilize the economy. For example, central banks use monetary policy to either raise or reduce the amount of money in circulation. In contrast, fiscal policy regulates the amount of money the government spends.

• The macroeconomic policy aims to produce a stable economic climate that encourages robust and sustained economic growth, which is necessary for producing employment, wealth, and higher living standards.
• When addressing large issues like unemployment, inflation, and a nation's current gross domestic product, policymakers must consider various variables (GDP). As a result, diverse philosophies exist on achieving development and a healthy economy.
• The macroeconomic policy aims at the stable and durable economic expansion, low inflation levels, low unemployment rates, and an equitable allocation of a nation's income.

Macroeconomic policy is a tool that policymakers use to assist them in regulating an economy. The functioning of the economy as a whole is what macroeconomic policy analyses and attempts to influence. Generally, the macroeconomic policy aims to create a stable economic environment that promotes robust and sustained economic growth. This growth is necessary to produce jobs, accumulate wealth, and enhance living standards. The fiscal policy, the monetary policy, and the exchange rate policy are the three most important pillars of macroeconomic policy.

The field of macroeconomics examines economic decision-making on a more expansive scale, such as that of an entire area, country, or world. As a consequence of this, governments all over the world make use of macroeconomic policies to attain a balanced performance from their economies. Policies about macroeconomics are the instruments that assist policymakers in regulating an economy. Monetary policy and fiscal policy comprise the two primary subsets included in it.

Many other goals, including political, social, and economic ones, are on the list of things that governments strive to accomplish. It is typical for a government to formulate policies to achieve these goals. This gets us to the concept of a "goal of policy."

The following are some examples of the aims of macroeconomic policy:

• First, reach exceptionally high levels of economic expansion.
• Second, keep unemployment at historically low levels.
• Third, get price stability under control.
• Fourth, keeps the balance of payments in a good position.

The following are the types of macroeconomic policies.

#1 - Fiscal Policy

Changes in the total amount and composition of government spending, the total amount and types of taxes collected, and the total amount and nature of government borrowing are all examples of how fiscal policy may be implemented.

In addition, directly affecting business activity using regular and capital expenditures and passively through the impacts of expenditures, taxes, and levies on private consumption, investment, and net exports are also viable options for governments seeking to exert influence over economic activity. However, under the existing framework of institutional structures, the only aspect of macroeconomic policy directly under the government's authority is fiscal policy.

Fiscal policy can reflect either the discretionary acts of the government or the effect of the so-called "automatic stabilizers" when used as an instrument for reducing volatility in economic activity. One example of a discretionary measure taken by the government to promote aggregate demand is a fiscal stimulus package, which typically consists of increased public expenditure and reduced tax rates.

#2 - Monetary policy

By altering the availability or price of money, i.e., the rate of interest in an economy, monetary policy works to stabilize aggregate demand in the economy. This is done to achieve full employment. It is possible to describe the monetary policy as a policy that uses the central bank's ability to manage the money supply as a tool to attain the central bank's macroeconomic aims.

Decisions on monetary policy are implemented by adjusting various cash rates (the interest rate on overnight loans in the money market). The cash rate is settled on the money market due to the competition between supply and demand for overnight funds. The government can target the cash rate through open market operations, which involves either boosting or lowering the number of funds banks employ to settle transactions among themselves.

Let us have a look at the following examples to understand the concept better.

Example #1

An article by the International Monetary Fund illustrates the connection between macroeconomic policy and poverty alleviation. In it, it is stated that the impact of growth on the income of the poor was, on average, the same in developing countries as in rich countries and that the poverty–growth connection had not shifted in recent years.

That policy-induced growth was just as beneficial for the poor as it was for the public. It emphasizes that to enhance macroeconomic stability, nations ought to encourage macroeconomic policy with policy transformation that enhances and boosts the performance of these markets and sectors. This is something that needs to be done for countries to be able to enhance macroeconomic stability.

Example #2

Economic policies, namely fiscal and monetary policy, affect investors. To keep an expanding economy's long-term supply and demand dynamics in balance, monetary and fiscal policies will frequently result in short-term implications to various asset classes and the financial markets, affecting investors. In addition, because of low-interest rates, investors are encouraged to retain more cash and assets equal to cash.

Following are the challenges that are faced during the framing of macroeconomic policies.

#1 - Unemployment

Involuntary inactivity of resources, such as personnel, is referred to when discussing unemployment. If this issue persists, society's gross national product (GNP) will come in lower than it can produce. Therefore, one of the government policy goals is to guarantee that there is no involuntary unemployment of any kind, which means that full employment is one of the aims. The difficulty is expanding the economy from one era to the next so that unemployment rates remain relatively low.

#2 - Inflation

Inflation refers to a circumstance in which the prices of goods and the factors of production are constantly going up. On the other hand, deflation is the term used to describe the reverse of inflation. As a result, some people end up ahead, but the vast majority need to catch up. This results in a shift in the typical pattern of how money is distributed. As a result, maintaining price level stability— ensuring neither inflation nor deflation—is one of the government policy goals.

#3 - GDP

Output, the most significant notion in macroeconomics, refers to the entire quantity of goods and services a nation generates. It is generally referred to as the gross domestic product (GDP). However, this number may represent the state of the economy at a certain instant in time. Macroeconomists typically use real GDP, which takes inflation into account. This is in contrast to nominal GDP, which only represents price increases. Because an increase in inflation from one year to the next results in a larger nominal GDP number. However, this does not necessarily indicate that output levels are greater; rather, it merely indicates higher prices.

• It contributes to the accomplishment of the objective of achieving economic growth as well as increased levels of employment. In addition, it provides an analysis of the factors that affect a nation's economic growth. It explains how to achieve the maximum possible level of economic growth and maintain it.
• It maintains a stable pricing level and analyses changes in business operations. It makes recommendations for policy actions that may be used to manage inflation and deflation.
• It explains the various criteria that impact the balance of payment. At the same time, it offers corrective actions and analyses the factors contributing to the deficit in the balance of payments.
• It contributes to resolving economic issues that can only be resolved at the macro level, that is, at the level of the entire economy, such as poverty, unemployment, and business cycles, amongst other issues.

This has been a guide to what is Macroeconomic Policy. We explain its objectives, types, importance, issues, and examples. You can learn more about finance from the following articles –

• Contractionary Monetary Policy
• Macroeconomic Factor
• Expansionary Policy