macroeconomic policy, how does it work? (1 Viewer)
- Thread starter baraka003
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Firstly, marcoeconomic policy (fiscal and monetary policy) functions to smooth out the upturns and downturns in a business cycle.
Economic growth is curbed by adopting a contractionary fiscal policy, that is, by reducing government expenditure (i.e. transfer payments) and increasing tax revenue. In effect, this will reduce the level of aggregrate demand by restraining consumption and investment. In addition this will also have the effect of limiting inflation (i.e cost-push inflation ), because a reduction in demand will relief pressure on the supply of goods and services.
MP is a short term measure to control the level of eco growth and inflation. If the gov also wants to reduce economic growth because the level of inflation is becoming too high (above 3%), they can tighten MP policy through the RBA by selling commonwealth government securites which will decrease the supply of money, pushing up the cash rate and in turn causing banks to increase interest rates. This rise in interest rates will discourage investment and consumption, reducing economic growth and therefore reducing inflationary pressures.
hope that helps man..im not that great with eco.. oh btw the opposite effect will occur..if they want to increasing economic growth...by applying an expansionary fiscal policy and/or loosening monetary policy which will reduce interest rates..
Economic growth is curbed by adopting a contractionary fiscal policy, that is, by reducing government expenditure (i.e. transfer payments) and increasing tax revenue. In effect, this will reduce the level of aggregrate demand by restraining consumption and investment. In addition this will also have the effect of limiting inflation (i.e cost-push inflation ), because a reduction in demand will relief pressure on the supply of goods and services.
MP is a short term measure to control the level of eco growth and inflation. If the gov also wants to reduce economic growth because the level of inflation is becoming too high (above 3%), they can tighten MP policy through the RBA by selling commonwealth government securites which will decrease the supply of money, pushing up the cash rate and in turn causing banks to increase interest rates. This rise in interest rates will discourage investment and consumption, reducing economic growth and therefore reducing inflationary pressures.
hope that helps man..im not that great with eco.. oh btw the opposite effect will occur..if they want to increasing economic growth...by applying an expansionary fiscal policy and/or loosening monetary policy which will reduce interest rates..
That was helpful. Another question, what is the relationship between exchange rates and inflation? I've been over it but i dont quite undertsand how it works
also i read my notes quite wrong, how does macro work to achieve external balance?
also i read my notes quite wrong, how does macro work to achieve external balance?
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but takes far longer?
Microeconomic reform (MER) takes much, much longer than macroeconomic. MER often takes years to have the full intended effect, whereas macro is generally a matter of months
1) A high level of inflation will discourage investors to invest in a currency, many will sell out and the currency hence will depreciate. The currency, irrelevant of investor sentiment, however, will depreciate anyway where there is high inflation, as more and more australian dollars will be needed to equal the same amount of a foreign currency, provided that currency is not inflation-ridden.
2) Macroeconomic policy generally isn't targeted at external balance, but often has indirect effects, particularly the changing of interest rates. When interest rates go up, the $A will appreciate, whereas down the $A will depreciate, affecting all the components of external balance- the capital and financial account, and the current account
Well it's examine, so basically using economic terminology explain each policy form available, e.g.:
-taxation
-monetary policy - interest rates
-Government spending initiatives through budget, e.g. infrastructure works
etc., there are probably others but right now I can't think of them
Adding to this:
- A low exchange rate will increase the cost of imports leading to imported inflation.
- High domestic inflation will make it harder for exporters to pass off their higher costs thus reducing the level of demand for domestic goods, raise the supply of the $A and raise the exchange rate.
Its also important to remmeber that everything will impact on everything
yeah thats pretty much economics in a sentence