Macroeconomics: Goals, Policy Instruments, and Other Factors Affecting a Macro Economy

Macroeconomics is concerned with issues, objectives, policies that affect the whole economy.
All economic analysis that refers to aggregates is macro. Macroeconomics studies the behavior
and performance of an economy as a whole. It focuses on the aggregate changes in the economy
such as unemployment, growth rate, gross domestic product and inflation.

A. What are the goals of Macroeconomics?

Full Employment

Full employment is achieved when all available resources (labor, capital, land,

and entrepreneurship) are used to produce goods and services. This goal is commonly
indicated by the employment of labor resources (measured by the unemployment rate).
However, all resources in the economy--labor, capital, land, and entrepreneurship--are
important to this goal. The economy benefits from full employment because resources
produce the goods that satisfy the wants and needs that lessens the scarcity problem. If
the resources are not employed, then they are not producing and satisfaction is not
achieved.

Stability

Stability is achieved by avoiding or limiting fluctuations in production, employment, and

prices. Stability seeks to avoid the recessionary declines and inflationary expansions
of business cycles. This goal is indicated by month-to-month and year-to-year changes in
various economic measures, such as the inflation rate, the unemployment rate, and the
growth rate of production. If these remain unchanged, then stability is at hand.
Maintaining stability is beneficial because it means uncertainty and disruptions in the
economy are avoided. It means consumers and businesses can safely pursue long-
term consumption and production plans. Policies makers are usually most concerned with
price stability and the inflation rate.

Economic Growth

Economic growth is achieved by increasing the economy's ability to produce goods and
services. This goal is best indicated by measuring the growth rate of production. If the
economy produces more goods this year than last, then it is growing. Economic growth is
also indicated by increases in the quantities of the resources--labor, capital, land, and
entrepreneurship--used to produce goods. With economic growth, society gets more
goods that can be used to satisfy more wants and needs--people are better off; living
standards rise; and scarcity is less of a problem.
B. What are the policy instruments?
Macroeconomic policy is concerned with the operation of the economy as a whole. In
broad terms, the goal of macroeconomic policy is to provide a stable economic
environment that is conducive to fostering strong and sustainable economic growth, on
which the creation of jobs, wealth and improved living standards depend. The key pillars
of macroeconomic policy are: fiscal policy, monetary policy and exchange rate policy.

Fiscal policy

Fiscal policy operates through changes in the level and composition of government
spending, the level and types of taxes levied and the level and form of government
borrowing. Governments can directly influence economic activity through recurrent and
capital expenditure, and indirectly, through the effects of spending, taxes and transfers on
private consumption, investment and net exports.

Fiscal policy is based on the theories of British economist John Maynard Keynes. Also
known as Keynesian economics, this theory basically states that governments can
influence macroeconomic productivity levels by increasing or decreasing tax levels and
public spending. This influence, in turn, curbs inflation (generally considered to be healthy
when between 2% and 3%), increases employment, and maintains a healthy value of
money. Fiscal policy plays a very important role in managing a country's economy.

As an instrument for stabilizing fluctuations in economic activity, fiscal policy can reflect
discretionary actions by government or the influence of the ‘automatic stabilizers’. The
‘automatic stabilizers’ refers to certain types of government spending and revenue that are
sensitive to changes in economic activity, and to the size and inertia of government more
generally. They have a stabilizing effect on fluctuations in aggregate demand and operate
without requiring any specific actions by government.

Monetary policy

Monetary policy is the macroeconomic policy laid down by the central bank. It involves

management of money supply and interest rate and is the demand side economic
policy used by the government of a country to achieve macroeconomic objectives like
inflation, consumption, growth and liquidity.

Monetary policy can be either expansive for the economy (short-term rates low relative to
the inflation rate) or restrictive for the economy (short-term rates high relative to the
inflation rate). Historically, the major objective of monetary policy had been to use these
policy instruments to manage or curb domestic inflation. More recently, central bankers
have often focused on a second objective: managing economic growth, as both inflation
and economic growth are highly interrelated.

Exchange rate policy

Exchange rate policy is concerned with how the value of the domestic currency, relative to
other currencies, is determined. Exchange rate policy involves choosing an exchange rate
 system and determining the particular rate at which foreign exchange transactions will
take place. A country’s exchange rate policy affects its relative price structure in domestic
currency terms between goods which are traded internationally (tradables) and goods
which are produced for the domestic market (non–tradables or home goods). Moreover,
exchange rate policy will affect the overall level of domestic prices. For these reasons, the
particular exchange rate system and exchange rate level selected will have a widespread
impact, in terms of price incentives, on the entire economy.

C. What other factors affect a certain macro economy?

A macroeconomic factor is a pattern, characteristic, or condition that emanates from, or
relates to, a larger aspect of an economy rather than to a particular population. The
characteristic may be a significant economic, environmental, or geopolitical event that
widely influences a regional or national economy.
Types of macroeconomic factors:
1. Positive

Positive macroeconomic factors comprise of events that ultimately stimulate

economic stability and expansion within a country or a group of countries. Any
development leading to a rise in demand for goods or services (e.g., a decrease in price)
is considered a positive macroeconomic factor. As the demand for products and
services grows, domestic and foreign suppliers of the products will inevitably benefit
from increased revenues resulting from increased customer traffic. Higher profits will, in
effect, grow stock prices on a larger scale.

2. Negative

Negative macroeconomic factors include events that may threaten the national or global
economy. Concerns of political uncertainty induced by the involvement of a nation in
civil or global conflict are likely to worsen economic unrest due to the redistribution of
resources or damage to property, assets, and livelihoods. Negative macroeconomic
factors include events that may jeopardize national or international economies. Fears of
political instability caused by a nation’s involvement in a civil or international war, are
likely to heighten economic turbulence, due to the reallocation of resources, or damage to
property, assets, and livelihoods. Other negative macroeconomic factors include natural
disasters, such as earthquakes, tornadoes, flooding, and brushfires.

3. Neutral

Some economic changes are neither positive nor negative. Instead, the exact
consequences are assessed based on the purpose of the action, such as the control of trade
across regional or national borders. The nature of a particular action, such as the
implementation or discontinuance of a trade embargo, would come with a variety of
consequences that are dependent on the country being impacted and the objectives behind
the action taken.
 Factors that affect macro economy:

 Economic factors

 Demographic forces

 Technological factors

 Natural and physical forces

 Political and legal forces

 Social and cultural forces

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