MacroeconomicsI_working_version (1)

Macroeconomic Policy 105
We can summarize the goals of macroeconomic policy as follows:
1) A high and growing level of national aggregate output (real GDP)
2) High level of employment (with low involuntary unemployment)
3) A stable or gently rising price level, with prices and wages determined by supply
and demand in free markets.
4) Large international trade in goods, services, and capital, with a stable foreign
exchange rate and exports balancing imports (trade balance).
11.1. Policy Instruments
Government and other state institutions 1 can use a range of instruments that can be used to
affect macroeconomic activity in a country. These policy instruments can be expressed as
economic variables under control of government that can influence one or more of the
macroeconomic goals. In other words, fiscal, monetary, incomes and other policies might
be used so that government could drive the economy towards required shape in terms of
desired combination of output, employment, price stability and international trade. The
policy instruments can be summarised to four major sets described in the right-hand
column in the table 11.1.
11.1.1. Fiscal Policy
The taxes and government spending are the instruments used in a frame of fiscal policy.
The government control its expenditures, which is government spending on goods and
services (purchases of army equipment, building motorways or dams, paying salaries to
state employees etc.) Government spending also affects the distinction between private and
public sectors, that is how much of GDP will be consumed collectively rather than
privately. The crucial function of government expenditure in terms of macroeconomics is
that, government spending influences the total level of spending in the economy and thus
affects the level of aggregate output (GDP).
Government can use another tool in its fiscal policy – taxation. Taxes reduce people’s
incomes. Thus, taxes decrease people’s disposable income that would be used for
consumption. Accordingly taxes reduce the amount of aggregate consumption and in turn
decrease demand for goods and services. The ultimate effect is slowing down the growth of
real GDP (or a decline in real GDP as a whole).
The taxes also work as a factor of motivation. High taxes reduce profits, increase prices and
as a final effect they could discourage firms to invest in new capital goods or launch new
business projects.
1 For instance the national central bank represents the state institution pursuing monetary policy in a country.
Most of central banks are independent on government in a majority of modern economies.