Macroeconomic, microeconomic, fiscal and monetary policies?? (1 Viewer)

[Mathew587]

Hi,
Can someone please explain the difference and similarities between macroeconomic, microeconomic, fiscal and monetary policies. I've also heard that monetary policies are more for the longer term while fiscal is more for the shorter term.Our teacher will be away for three weeks and I just need to get my head around this.
Thank you

 

[aidan059]

Macroeconomic policies involve either fiscal policy or monetary policy - INFLUENCES AGGREGATE DEMAND
Fiscal policy -
- This is the budget released mid may every year
- There are two ways it can be enacted - through either government spending or taxation
EXPANSIONARY FISCAL POLICY (THE GAS) - This is usually enacted in a recession to boost ec growth, they either lower taxes or increase government spending or both. Lower taxes leads to increase in disposable income for individuals and investors, which ultimately leads to increased investment and consumption therefore increased aggregate demand and increased gdp. Government spending is self explanatory
CONTRACTIONARY FISCAL POLICY (THE BRAKE) - This is usually enacted in a boom to slow ec growth, basically the opposite, either increase taxes or decrease government spending or both. Same thing, higher taxes leads to less disposable income, leading to decreased consumption leading to decreased aggregate demand and lower gdp.
Fiscal is not necessarily short term. Say for example the government increases spending and decides to build a bridge. They must plan to build it, consulting with people, get it through parliament, find workers and actually build the bridge. By the time it's done the economy could be out of recession and at full employment

Monetary Policy
- Enacted by the RBA to influence the money supply market and the cash rate
- Either sells or buys commonwealth government securities in the short term money markets to banks (ie westpac, cba etc) - known as domestic market operations
LOOSENING MONETARY POLICY - Enacted to increase economic growth. The RBA BUYS commonwealth government securities in the overnight money market, which INCREASES the money supply as there is now an excess of borrowable funds from the banks. This leads to a decrease in the cash rate and ultimately a decrease in market interest rates. Consumers & investors can now more easily access funds due to lower interest rates to pay back on the loans. This leads to an increase in investment and consumption, leading to an increase in aggregate demand and an increase in GDP.
TIGHTENING MONTARY POLICY - Enacted to slow down economic growth. The RBA SELLS commonwealth government securities in the overnight money markets, which DECREASES the money supply as there is now a shortage of borrowable funds from the banks. This leads to an increase in the cash rate and ultimately an increase in market interest rates. Consumers & investors do not want to borrow funds as there is high interest rates and loans will be more expensive to pay back, therefore investment and consumption will fall, leading to decrease in aggregate demand and a decrease in GDP.

As for Microeconomic - Deals with AGGREGATE SUPPLY
Mainly aimed at individual industries seeking to increase aggregate supply (output) by improving efficiency and productivity of producers. This is enacted by the government with examples including deregulation, competition policy, tax polcy and reducing protection etc. I'm not extremely familiar with micro so you might have to ask someone else.

 

[BenHowe]

All of this comes under the heading of economic policy. From that you have macroeconomic policy and microeconomic policy. Macro is then broken down into fiscal (government) and monetary (RBA).

They are all utilised in an attempt to achieve the economic objectives of stable prices,econ growth, sustainable debt, perfect unemployment, ecologically sustainable development and equality (the specific wording you need to use is in the syllabus).

Macroeconomic policy is cyclical i.e. it is used to counter-act changes in or stabilise the business cycle. For example if there is a period of economic growth the government will implement contractionary fiscal policy and the RBA contractionary monetary policy etc. Note they can act as automatic stabilisers i.e. if in a boom peoples income rise, they will be taxed more, which will result in less disposable income and consumption decreasing economic growth etc.

Microeconomic policy focuses on structural change, literally because the economy is inefficiently allocating its finite resources, it must change and re-allocate these resources to more efficient industries. However this is easier said then done as a general rule of thumb about strucutural change is that it has a small benefit for many and is extremely detrimental for few i.e. a now structurally unemployed construction worker from Holden etc. It can often gain a lot of media attention and slow the whole process etc.

Now the next thing you need to consider are time lags. They can be broken up into 3 sections:
1. Recognition
2. Implementation
3. Impact

So in regards to fiscal policy, recognition of an economic issue such as rising unemployment is fairly quick due to economists/statisticians constantly monitoring the economy. The implementation happens once a year when the budget is released, so this is quite slow i.e. in response to a quarterly downturn etc. However the impact occurs very quickly i.e. a government project such as building roads/schools occurs pretty much immediately.

Monetary policy is similar to fiscal policy in that the recognition of lag occurs fairly quickly due to constant monitoring. The implimentation is fairly quick as well. This occurs monthly in the RBA's monthly policy. Note you can lookup the summary of the outcome/discussion of the meeting on the RBA website. This information is called the 'minutes' and is a really useful tool to bolster your essay by incorporating current statistics and economic events into your arguments. How the impact is quite slow, because remember the RBA only indirectly influences the level of interest rates within the economy via the transmission mechanism, so the impact of a change in policy typically takes at least 18 months+ to have any noticeable affect.

Lastly microeconomic policy. The recognition can often be slow because an issue in a particular part of the economy such as a lack of international competitiveness in textiles etc. can often be affected by both cyclical and structural factors. The implementation again is a reasonable period of time because there are often political lags with this type of policy, because structural change benefits the vast majority of people in a small way i.e. free trade -> better/cheaper goods/services for consumers but really hurts a small group of people or industry i.e. decline of the manufacturing sector in Australia resulting in large structural unemployment i.e. Holden closing factories etc. A good example is Bluescope steel, are not internationally competitive due to the better quality/lower prices of their foreign competitors i.e. China. They recently lobbied the government some assistance or a bailout and even though they were unsuccessful it attracted a lot of media attention etc. Similarly the impact is often slow i.e. textiles producer still receive some form of subsidies today despite no longer 'really' manufactured in Australia.

Sorry for the long explanation it has been a while since I've done this stuff. Hope this helps.

 

[shumaila]

Microeconomics deals with small parts of an economy like single producer and consumer. In this branch of economics we analyzed how consumers and producers made decision limited to income and cost.
In microeconomics market equilibrium taking place where quantity demand is equal to quantity supply. This branch of economics always reveals stable equilibrium position. At equilibrium point
Qd = Qs

This branch of economics emphasis on economic theory. Microeconomics explain economic theories under classical school of thought.

In microeconomics we only see the taxation implications on single consumer or producer.

While Macroeconomics deal with large parts of an economy like unemployemnt, inflation, monetary and fiscal policy etc. Macroeconomics
deals how aggregate demand and supply influence price and output in an economy. While in case of macroeconomics market equilibrium reveals the equality between aggregate demand and supply. But due to aggregate analysis there is sometimes market disequilibrium. At equilibrium point
AD = AS

Macroeconomics focus on mathematical as well as empirical data to check the validity of economic results.

On the other hand macroeconomics discuss under different school of thoughts e.g Classical, New Classical, Keynesian, Monetarist, Neo Classical and New Keynesian.


While macroeconomics looks at the complete implications of taxation policy on the whole economy.

Monetary policy is such a policy which control all monetary measures. Tight monetary policy means that decrease in money supply increase the interest rate and decrease the level of investment.
Easy monetary policy means that increase in money supply decraese in interest rate and increase in inveastment.

Fiscal policy measures all tax and government spending. There are two types of fiscal policy tight and easy fiscal policy.

Easy fiscal policy means that decrease in taxes and increase in governemnt spending. While tight fiscal policy means that increase in tax rate and decrease in governemnt spending.