A2 Macroeconomics / International Economy

Government Macroeconomic Policy

A central issue in macroeconomics is whether or not markets, left alone, automatically bring about long run economic equilibrium.  If the free operation of market forces eventually resulted in a full employment level of national income with stable prices and economic growth, there would be no need for government intervention in the macro economy - no need for fiscal monetary exchange rate and supply side policies. The reality is that all governments intervene through their macroeconomic policies in a bid to achieve certain policy objectives and improve the performance of the economy. Targets, instruments and goals of macroeconomic policy Policy goals are the ultimate aims, challenges and objectives of macroeconomic policy. The main policy goals of the current government are listed below: Sustained economic growth High employment Stable prices (low inflation) A rise in average living standards Sustainable position on the balance of payments Policy Instruments Policy instruments are the main options available to a government for managing the economy. There are broadly speaking three main policy groups: Fiscal Policy Fiscal policy involves changes in the composition and level of government spending, taxation and borrowing to influence both the pattern of economic activity and also the level and growth of aggregate demand, output and employment. Monetary Policy Monetary policy involves the use of changes in interest rates to control the level and rate of growth of aggregate demand in the economy mainly by changing the cost of borrowing money, influencing the rate of return on savings and thereby changing the overall demand for and supply of money Monetary policy also involves the effects of changes in the exchange rate – the external value of one currency against another – on the wider economy. The government (through the central bank) may choose to intervene in the foreign exchange market to influence the value of one currency against another Supply-side Policies Supply-side economic policies are mainly micro-economic policies designed to improve the supply-side potential of an economy, make markets and industries operate more efficiently and thereby contribute to a faster rate of growth of real national output.