Macroeconomic Policies

MACROECONOMIC POLICIES can be defined as sets of rules or regulations aimed to influence or control macroeconomic variables, such as aggregate income, unemployment, growth, and the general level of wages, prices, and interest rates. Macroeconomic policies can be broadly divided into demand-management policies and supply-management policies.

Demand-management policies are indirect management policies by which a government attempts to influence the level and composition of income and output, indirectly through the control of velocity, the money supply, and interest rates. Fiscal policy, monetary policy, and debt-management policy represent these types of economic processes.

Fiscal policy generally refers to the use of taxation and government expenditure to regulate the overall economic activity. Consequently if unemployment is high, income and expenditure taxes may be varied to stimulate the level of aggregate demand. The use of fiscal policy presumes changes in the government's budget, including the possibility of deficits. Alternatively, fiscal policies can be described as the budgetary processes that control the velocity of the money supply. Thus, a deficit budget would increase the velocity and stimulate aggregate demand. A surplus budget reduces velocity and restrains the aggregate demand.

Monetary policy is a macroeconomic policy by which the central bank changes the amount of money supply in circulation and/or the general level of interest rates. The tools of a monetary policy include reserve requirements, liquidity ratios, discount rates, lender of last resort facilities, and open market operations.

Debt-management policy denotes the action taken by the central bank to regulate the size and structure of the outstanding debt. It also can be described as the practice of funding the federal government's debts by using securities with differing maturities to influence economic activity. By changing production costs and expectations of the future, the federal government indirectly influences economic activity. In addition, debt management affects the foreign exchange rate and the balance of payments by making securities more or less attractive to foreigners.

Unlike the indirect demand-management policies, supply-management policies may be both direct and indirect. These macroeconomic policies operate on the supply side of the market and influence the level and composition of income and output either by control of production and distribution processes or through tax incentives. Direct supply management policies were more prevalent in the former socialist economies and a number of developing countries.

On an international scale, the prevailing conceptions of macroeconomic policy has experienced a marked evolution over the past few decades. In the industrialized nations, the focus of policy has moved [Page 663]away from countercyclical fiscal prescriptions. The interest rate policy has become the major instrument in demandand supply-side management. Improvement of international trade policies around the world is seen as a principal avenue for promoting economic expansion for all trading partners. Moreover, secular issues, especially those related to budget deficits and entitlement programs have gained in prominence.

In developing nations, the approaches to economic policy have moved away from attempting to plan the expansion of output, by sectors and principal products, to policy reforms aimed toward creating sound macroeconomic climate and geared toward removing structural imbalances between various sectors.

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