Economics Made Easy for All Series- Macroeconomics

Economics Made Easy for All Series- Macroeconomics

The aim of macroeconomic studies is to formulate macroeconomic policies for macroeconomic management. The aim of all economies is to move on a path of stable growth of output and employment. At the government level it analyses the impact of fiscal and monetary policies on the nation with a view to guide it. In this blog we shall introduce this most fascinating subject of macroeconomics to include the concepts of fiscal and monetary policies.

3 Major Macroeconomic Problems

The 3 major problems studied in macroeconomics are:

  1. Achieving and maintaining a high rate of economic growth- GDP.
  2. Resolving the problems of unemployment and poverty alleviation.
  3. Controlling inflation- that is continuous rise in prices.

Macroeconomics: Complex and Growing field of Study

The field of macroeconomics is growing. It has thus emerged as the most challenging and fascinating branch of economics. There are no clear answers to some of the problems faced by nations and the world because of the growing complexity. Some of the factors making the study more complex are:

  • Impact of globalization.
  • Increasing international flow of humanity, capital and technology.
  • Growth of economic unions like the EU.

Fiscal and Monetary Policies

Fiscal Policy

Fiscal policy is the use of government revenue collection (mainly through taxes) and expenditure to influence the economy. Fiscal policy comes under the domain of the elected government. The Finance Minister in India controls it.
The two main instruments of fiscal policy are changes in the level and composition of taxation and government spending in various sectors. These changes can affect the following macroeconomic variables:

  • Increase aggregate demand and the level of economic activity by increase in government’s spending.
  • Promote savings and investments by raising interest rates.
  • The distribution of income by taxing the rich and providing direct transfer of money, or subsidies to the poor.

Monetary Policy

Monetary policy deals with the money supply, lending rates and interest rates and is often administered by a central bank, (RBI in case of India). The objectives of monetary policy are:

  • Control inflation.
  • Manage exchange rates of the currency.
  • Promote growth.
  • Maintain people’s confidence in the banking and financial system.
  • Provide different tools for customers’ help, such as acting as the “Banking Ombudsman.”
Coming Next

In the next blog in the series we shall discuss the working of fiscal policies.

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