Tuesday, August 25, 2009

Objectives and Instruments of Macro Economics

The major instruments of macro economic policy are described as under.

1. Fiscal Policy: Fiscal Policy denotes the used of laxes and government expenditure. Government expenditures come in two distinct forms. First there are government purchases. These comprise spending on goods and services. Purchases of tanks, construction of roads, salaries for jubges and so forth. In addition there are government transfer payments which boost the incomes of targeted groups such as elderly or unemployed. Government spending determines the relative size of the public and private sector that is how much of our GDP is consumed collectively rather than privatively. From a macro economic perspective, government expenditures also affect the over all level of spending in the economy and thereby influence the level of GDP.

The other part of fiscal policy laxation affects the overall economy in two ways. To begin o with taxes affect people’s incomes. By leaving house holds with more or less disposable or speudrble income taxes tend to affect the amount people spend on goods and services as well as the amount of private savings. Private consumption and saving have important effects on investment and output in the short and long run.

In addition taxes affect the prices of goods and factors of production and there by affect incentives and behaviour. For example during the period. 1962 to 1986 the USA employed an investment tax credit which was a sebrte to business that bought capital goods, as a way of stimulation investment and boosting economic growth. Many provisions of the laxe code have and important impact on economic activity through their effect on the incentive to work and to save.

2. Monetary Policy: The second major instrument of macro economic policy is monetary policy which the government conducts through managing the nation’s money, credit and banking system. Money consists of the means of exchange or method or payment. Today people use currency to pay their bills. By eughying in central-banks operations, the federal reserves can regulate the amount of money available to the economy.

How does such a minor thing as the money supply have such a large impact on macro economic activity? By changing the money supply, the federal reserve can influence many financial and economic variables, such as interest rates and reduced investment which in turn cruse a decline in GDP and lower inflation. If the central bank is faced with a business down turn, it can increase the money supply and lower the interest rate to stimulate economic activity.

The exact nature of monetary policy is one of the most important areas of macro economics. A policy of light money in the USA raised interest rates showed economic growth and raised. Unemployment in the period 1979to1982. Then from 1982 to 2000, careful monetary maurfeuent by the Federal Reserve supported the longest economy expansion in American history. Over the last deade monetary policy has become the major weapon used by the US government to fight the business cycle.

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