Principles Of Microeconomics Essay

MACROECONOMICS 1

Principles of Macroeconomics Essay

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MACROECONOMICS 2

Principles of Macroeconomics Essay

Introduction

Macroeconomics refers to the study of large-scale economic concerns that influence the

economy in the form of unemployment, inflation, price levels, economic decline as well as

economic growth and the relationship that exists between all these elements. The principles of

macroeconomics aim at analyzing the various factors relating to the structure and performance of

large macro economies such as the world’s economy and it directly impacts every part of life.

Besides, the policy of macroeconomics bases its concerns on the operations of the entire

economy, and it aims at providing a steady economic surrounding that is conducive to enhancing

suitable and robust economic growth. This paper, therefore, addresses some of the

macroeconomic policy goals, instruments and how policymakers can utilize these instruments in

achieving the objectives.

Macroeconomic policy goals

The domestic macroeconomic policy is concerned with how national resources and labor

are utilized in increasing production. It is also interested in the stability of the economic business

cycles as well as maximizing growth in the national output. Thus it has three critical domestic

macroeconomic policy goals which are business cycle stability, full employment, and economic

growth through optimizing national production. Full employment relates inversely to the

unemployment rate, and it has an objective that individuals who are above 16 years and who are

willing and able to work should be working. Full employment of the resource labor is significant

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because in the process all types resources from land, capital, labor to knowledge are all absorbed

in supplying goods and services, national production, or in reducing scarcity.

Production cycles or stability in business means that there exists a limitation that disrupts

variations in steady economic situations. Inflation disrupts economic expansions while recession

disrupts economic downturns. Whether development or expansion influence the stability of

financial condition, it leads to full employment in national production and price levels. This

shows the full utilization of all the available types of national resources. On the other hand

economic growth results from increased production of services and goods. Production increases

are tied directly to the business cycle stability and full employment as well. The process of

economic growth accompanies labor together with all other types of resources that are being

used in increasing national production and reducing scarcity. Thus from these illustrations, it is

seen that the unifying objective of the three domestic macroeconomic policy is to maximize

national production.

Macroeconomic domestic policy instruments

There are two critical macroeconomic local policy instruments namely fiscal policy and

monetary policy. They are considered as the pillars of macroeconomic growth. Budgetary policy

functions through variations in the types and level of taxes raised, level and government

composition spending as well as the form and level of borrowing in the government. Therefore,

governments can indirectly impact the economic practice through the spending effects, taxes,

investment, private consumption transfers and net exports. Likewise, they can also affect this

activity through intermittent and capital expenditure. Fiscal policy is the only macroeconomic

policy arm under the institutional arrangement that is controlled directly by the government. The

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system is an instrument for stabilizing the economic activity fluctuations, and therefore it reflects

on the discretionary actions of the government or the implications of automatic stabilizers.

Automatic stabilizers are certain kinds of revenue and governments spending that easily

affect the economic activity as well as the inertia and the general size of government. They

possess a stabilizing impact towards the variation in the aggregate demand, and they operate

without any requirement from any precise government actions. For instance, if the economy

slackens in that, if the budget revenue side on the amount of tax collected declines, due to factors

such as taxpayers’ income fall and corporate profits, then the implications of these changes may

set off part of the aggregate demand turn down. Therefore, this sensible cyclic causes the fiscal

policy to be contractionary during upturns and automatically expansionary during downturns in

the economic process.

Meanwhile, the implementations of the decisions of the monetary policy are done by

modifying the cash rates which are the interest rates charged on overnight lends in the financial

market. Supply forces and overnight demand funds are used in determining the cash rate. For

instance, the Australia Reserve Bank is accountable for laying out the monetary policy, and thus

the bank directs cash rate by decreasing or increasing the fund supplies that most banks utilize in

settling individual transactions. An example is that, if RBA needs to reduce the cash rate, it can

stock additional exchange fund settlements than what the full-service banks would want to hold.

In this case, banks will react by unloading funds, and this will push the cash rate to lower levels.

Making changes to the cash rate enables the RBA to regulate the interest rates across the

financial system. These modifications in the interest rates can successively control the economic

process. It can affect the investment behavior and savings or credit supply, asset process,

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household expenditure as well as the exchange rate. Besides, when demand pressures reflected

in the rising prices build up in the economy, then RBA can constrain the monetary policy and by

that means weakens the demand. Conversely, when deflationary pressures result in a weak

market, then the RBA can relax the financial system to sustain the economic activity.

Nevertheless, the monetary policy can put forth an impact on the macroeconomy if the interest

rates remain unvaried. And something which is of more concern is the degree of the interest

rates. The cash rates may not have undergone modifications for some period, but then, the degree

of the interest rates is nevertheless exerting strong contractionary or expansionary implications

on the economy.

Policy Mix

The combination of both the monetary and fiscal policy that policymakers utilize in

managing the economy is known as policy mix. In most cases, the elected legislatures in

democratic countries always control the fiscal policy while the independent central banks

maintain the monetary system. The central banks and the government generally share a wide

range of objectives which include stable prices, reduced unemployment, healthy growth and

moderate interests. The two parties employ different equipment in accomplishing these

objectives and also emphasize different priorities. For example, monetary policy affects short-

term benefits whereas government budgets influence long-term rates. Also, while governments

must win democratic approval, central banks are technocrats, and they are not directly

answerable to voters. Nevertheless, there are some cases where the monetary and fiscal

policymakers work together. For instance, the government may pass a budgetary stimulus thus

increasing spending and cutting taxes and also the central bank might offer monetary stimulus

which cuts short-term interest rates. This is an example of the policy mix that characterized the

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2008 financial crisis in the US. However, at other times, the monetary and fiscal policy can push

in distinct directions in that the budgetary policymakers may pursue austerity while the central

bank might ease the financial system.

Achieving policy goals

As mentioned above the primary macro policy tools are fiscal which includes

government spending, taxes, and monetary policy. Therefore, to achieve the macroeconomic

domestic policy goals, policymakers can utilize these tools to encounter the concerns of

stagflation, recessions and overheating. Recessions are considered to be characterized by

overheating and high unemployment whereas overheating results from high inflation and thus

they are the opposites of each other. Therefore, policymakers have a responsibility to perform

different activities to combat these issues critically. For instance, when the economy experiences

a recession, and there are high unemployment rates as well, policymakers must try to hasten the

economy. And this can be done rendering more money to the people by either reducing the

amount of taxes levied so that the government receives less money while more remains with the

people or by maximizing government expenditure so that it pays additional money to the people

who offer services and goods. The objective can also be achieved by attempting to obtain an

expansionary monetary policy which involves either purchasing government securities or

lowering the interest rates which adds more money to the economy. Hence all these will help in

reducing unemployment and stimulating the economy.

When it comes to overheating, the problem is now turned around, and it means excess

money in the economy which drives up the prices of goods and services. Therefore, the

government needs to reduce the amount of money circulating in the market. To achieve this, it

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can either cut spending and raise taxes or even pursue a contractionary monetary policy by

purchasing government securities or increasing the interest rates of borrowing services offered.

This will hence minimize the aggregate demand thereby reducing inflation concerns. On the

other hand, an economy experiences stagflation when there is increased inflation with high

unemployment rates and less economic growth. Policymakers find it challenging in combating

the challenges of stagflation since any policy implemented to minimize unemployment will

increase inflation. The process of solving stagflation is therefore not easy for instance the central

bank can use monetary policy to reduce inflation by raising interest rates through raising

borrowing costs, and this may prove successful in reducing the aggregate demand and thus

reduced inflation. However, this will significantly cause a drastic fall in the GDP. And therefore

the Central Bank may become reluctant in targeting inflation when the growth of the economy is

low.

Conclusion

Macroeconomics is an integral part of economics as it presents policies and instruments

which are considered useful in achieving the macroeconomic goals that play a crucial role as far

as economic growth is concerned. The macro policy goals addressed in this paper include

business cycle stability, full employment, and economic growth. They define the utilization of

national resources as well as labor in maximizing production. Besides, domestic macroeconomic

instruments include fiscal and monetary policy. These policy instruments are significant in

achieving the above objectives as they assist in solving issues of recessions, overheating and

stagflation. Recession challenges result from unemployment and overheating which is an

outcome of inflation thus policymakers have a responsibility to perform different activities to

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combat these issues critically. And although it seems challenging in handling the issue of

stagflation, the policy instruments still remain important in partially solving the problem.

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