MacroeconomicsI_working_version (1)

Macroeconomic Policy 107
The efficiency of income policy is a controversial topic. The economists still argue if the
income policy represents an inexpensive way to lower inflation or it is a simply ineffective
policy disturbing the assumptions of free markets with a weak impact on rising prices.
Summary:
Let’s sum up the variety of instruments that can be used to reach macroeconomic goals.
The four main areas include:
Fiscal policy consists of government expenditures and taxation. Government expenditures
influences the relative size of collective as opposed to private consumption. Taxation
subtracts from incomes and reduces private spending; in addition, it affects investment and
potential output. Fiscal policy affects total spending and thereby influences real GDP and
inflation.
Monetary policy conducted by the central bank determines the money supply. Changes in
the money supply move interest rates up or down and affect spending in sectors such as
investment, housing, and net exports. Monetary policy has an important effect on both
actual and GDP and potential GDP.
Foreign economic policies – trade policies, exchange-rate setting, and monetary and fiscal
policies – attempt to keep imports in line with exports and to stabilize foreign exchange
rates. Governments work together to coordinate their macroeconomic goals and policies.
Incomes policies are government attempts to moderate inflation by direct steps, whether by
verbal persuasion or by legislated wage and price controls.
11.2. Macroeconomic Policies and Goals in Practise
We should mention that reaching of the macroeconomic goals through chosen policies is
not as easy as it could seem. There is a problem of trade-offs in macroeconomics in
practise. To pursuit macroeconomic policy implies to choose among competing objectives.
Lowering a high inflation rate requires either a period of high unemployment and low
output of interference with free markets through incomes policies. Decline in domestic
consumption and investment is needed in order to reduce trade deficits.