Macroeconomics

The study of an economy as a whole. Unlike microeconomics, it studies aggregate eco nomic variables, such as the general price level (using an index of consumer or producer prices), the national (un)employment rate, national saving, and national out put income (gross domestic product).

Although microeconomic issues might affect a partic ular segment or group of individuals in a national econ omy, macroeconomic issues affect everyone in a national economy and the overall well-being of a nation. The government and the monetary authorities are the prin cipal macroeconomic policymakers of a nation.

In the United States, there is emphasis on the inde pendence of these entities so that monetary policy is not infected by parochial political ambitions or interests. The degree of independent monetary policy making in the United States is sometimes questioned because the chairman of the Federal Reserve is appointed by the president subject to the approval of lawmakers. The position is also a political creation that can be expunged, although that is very unlikely or improbable. In some other nations, there is a consolidation of macroeco-nomic policy making, with very little emphasis on inde pendence. This makes it very difficult to make meaningful and rewarding macroeconomic policies.

Macroeconomic policies are generally designed to attain efficiency, equity, stability, and growth. Efficiency involves the production of what society wants at the least possible cost. By definition, there are allocative (distributive) and productive (cost sensitive) dimensions to efficiency.

Equity involves fairness in the distribution of national income. Fairness is arguably an elusive macroeconomic [Page 300]concept because of its subjective and normative conno tations, but there are normally efforts to evaluate tax structure based on notions of tax burden and societal wants and needs.

Progressive taxes are taxes that are paid based on the amount of income earned (the higher the income, the greater the taxes). Regressive taxes (such as sales taxes) are taxes for which the greater burden falls on those who make less income relative to the wealthy. Issues of merit and rewards for hard work or future growth (via invest ment) characterize macroeconomic debates on fairness.

Stability and growth require macroeconomic policies that aim at stabilizing prices in the hope of increasing out put or employment. Policies to stabilize a macroeconomy may be expansionary or contractionary. Expansionary policies are intended to deal with recessions or downturns, while contractionary policies are designed to deal with inflation or the propensity of an economy to overheat. Policy choices fall into two broad categories: (1) fiscal and (2) monetary.

Expansionary fiscal policy is the deliberate effort by a government to reduce taxes or increase spending. Expansionary monetary policy is the deliberate effort by a nation's monetary authorities to reduce the interest rate or increase the money supply. Contractionary poli cies are the opposite of expansionary policies. Some crit ics are skeptical about the use of policies to stabilize a macroeconomy, partly because of lags or wrong inter vention. For further reading, see Case and Fair (2003), Mankiw (2006), and McConnell and Brue (2008).