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Macroeconomic Policies
Submitted by:
M Irfan Rao (bsf2105035)
M Amir (bsf2105159)
M Waqar (bsf2005051)
Sharaiz Victor (bsf2105163)

Submitted to: Ms Ayesha Shahid

Department: BBA 03 Semister { Evening (B) }
University of Education Multan Campus.
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Macroeconomic Policies
1) Monetary policy
2) Fiscal policy

Monetary policy
Monetary policy addresses interest rates and the supply of money in circulation,
and it is generally managed by a central bank.
Monetary policy influences the supply of money the cost of money or the rate of
interest and availability of money.

Discretionary act undertaken by the authorities to influence

a) The supply of money

b) Cost of money or rate of interest
c) The availability of money

 Basis of monetary policy is that there is a long run relationship between the
amount of money inflation.
 Demand for money - the amount people wish to hold as cash as opposed to
other assets.
 The supply of money - the amount of money in circulation nation in the
economy.

Objectives of Monetary policy

Full Employment
Full employment has been ranked among the foremost objectives of monetary
policy. It is an important goal not only because unemployment leads to wastage of
potential output, but also because of the loss of social standing and self-respect.
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Price Stability
One of the policy objectives of monetary policy is to stabilize the price level. Both
economists and laymen favour this policy because fluctuations in prices bring
uncertainty and instability to the economy.

Economic Growth
one of the most important objectives of monetary policy in recent years has been
the rapid economic growth of an economy. Economic growth is defined as "the
process whereby the real per capita income of a country increases over a long
period of time."

Balance of Payments
Another objective of monetary policy since the 1950s has been to maintain
equilibrium in the balance of payments.

Controlled expansion
Control business cycle, Promote export and substitute imports. Promotes savings
and expansion, By ensuring more credit for priority sector.

To Regulate and Expand Banking

Give directives to different banks for setting up branches for promoting agriculture
credit.

Tools of Monetary policy

there are three main tools of monetary policy and these are given below.

1) Interest rate
2) Reserve ratios
3) Open market operations

Types of Monetary policy

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Expansionary monetary policy

This type of monetary policy can increase the economy’s money supply through
decreasing interest rates, lowering reserve requirements for banks, and the
purchase of government securities by central banks. This policy helps lower
unemployment rates as well as stimulate business activities and consumer
spending.

Contractionary monetary policy

This type of policy is used to decrease the amount of money circulating throughout
the economy, typically by selling government bonds, raising interest rates, and
increasing the reserve requirements for banks. The government uses this method
when it wants to avoid inflation.

Fiscal policy
 The fiscal policy is concerned with the raising of government revenue and
incurring of government expenditure. To generate revenue and to incur
expenditure.
 To generate revenue and to incur expenditure, the government frames a
policy called budgetary policy or fiscal policy. So, the fiscal policy is
concerned with government expenditure and government revenue.
 Fiscal policy has to decide on the size and pattern of flow of expenditure
from the government to the economy and from the economy back to the
government.
 In broad term fiscal policy refers to "that segment of national economic
policy which is primarily concerned with the receipts and expenditure of
central government.

Influences
Influence Aggregate Demand

 Tax regime influences consumption and investment

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 Government Spending
 Influences key economic objectives.
 Also used to influence non-economic objectives and provide framework
for supply side policy.
 e.g. education and health, poverty reduction, welfare reform, investment,
regional policies, promotion of enterprise, etc.

Types of Fiscal policy

There are three types of fiscal policy and these are given below
1) Contractionary fiscal policy
Contractionary monetary policy is a macroeconomic tool that a central
bank — in the US, that's the Federal Reserve — uses to reduce inflation.
Examples of this include increasing taxes and lowering government
spending.

2) Expansionary fiscal policy

Expansionary fiscal policy uses increased government spending, reduced
taxes or a combination of the two. The chief objective of a fiscal
expansion is to increase aggregate demand for goods and services across
the economy, as well as to reduce unemployment.
The two major examples of expansionary fiscal policy are tax cuts and
increased government spending.
3) Discretionary fiscal policy
Discretionary fiscal policy is the portion of the Federal government's
actions that can be changed year to year by Congress and the President. It
is usually executed through each year's budget or through changes in the
tax code.
For example, cutting VAT in 2009 to provide boost to spending.
Objective of Fiscal policy

 Price Stability and Control of Inflation

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One of the main objective of fiscal policy is to control inflation and stabilize
price. Therefore, the government always aims to control the inflation by
reducing fiscal deficits, introducing tax savings schemes, Productive use of
financial resources, etc.

 Full Employment

One of the government’s main objectives is to keep and get people into
work. Not only do governments benefit from higher taxes, but also from
lower expenditures on social security. An expansionary policy may look to
invest in infrastructure which would directly create employment.
Alternatively, it may reduce taxes to give consumers more money to
indirectly stimulate employment from their purchases.

 Control Debt

Running a budget deficit is not necessarily bad. However, over time it

creates more and more debt. If economic growth and tax receipts do not
increase it line, a nation faces an unsustainable level of debt. A rational
fiscal policy would aim to control this before having to take drastic action.

 Control Inflation
When an economy is growing strongly, it may experience high levels of
inflation (this may also depend on monetary policy). As 2 percent is
generally the target, anything above this is a cause for concern:
particularly if it is consistently above. Even though inflation is a monetary
phenomenon, there are steps governments take to try and stem such. With
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that said, there is little fiscal policy can do if the money supply has been
let loose. Nevertheless, governments try by increasing taxes to reduce
disposable incomes and hence consumption.

 Re-distribution

Another aim of the government is to transfer wealth from the rich to the
poor. Higher taxes on the rich can sometimes result in high tax receipts,
but this is not always the case. Evasion and avoidance may occur, or they
may in fact just leave the country. Although small incremental increases
may not have such a significant impact in the short-term.

 Efficient Allocation of Financial Resources

The central and state governments have tried to make efficient allocation of
financial resources. These resources are allocated for Development
Activities which includes expenditure on railways, infrastructure, etc.

 Increase Capital

The objective of fiscal policy in India is also to increase the rate of capital
formation so as to accelerate the rate of economic growth. In order to
increase the rate of capital formation, the fiscal policy must be efficiently
designed to encourage savings and discourage and reduce spending.

 Increase National Income

The fiscal policy aims to increase the national income of a country. This is
because fiscal policy facilitates the capital formation.

 Foreign Exchange Earning

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Fiscal policy attempts to encourage more exports by way of Fiscal Measures

like, exemption of income tax on export earnings, exemption of sales tax and
etc.

Effects of Fiscal policy

Unemployment
Unemployment is often stable in the long term, with a certain amount of the
population unable to work simply because of the constraints of a free market
economy

Expansion
Governments also work to encourage economic growth as a whole, funding
expansion through subsidies, tax cuts and new contracts with domestic and
international partners

Contraction
Governments worried about inflation can attempt to decrease inflation rates
through contraction, using fiscal policy to reign in natural inflation.

Inflation Issues
In an increasingly global economy and a free market economy, the changes a
government can make may be minimal or ineffective.

Measures of Fiscal policy

Taxes
Excess of aggregate demand over aggregates supply is caused due to the excess
amount of money income is the hands of the people in relation to the available.
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Public Expenditure
Public expenditure is an important component of aggregate demand. Therefore,
excess them and can be corrected by reducing government expenditure.

Public borrowing
Public expenditure, public borrowing is also an important anti fluxionary instrument.
Government of a country should to borrowing from the non-bank public to keep
less money in their hands for correcting the state of excess demand and inflationary
situation.

Difference between fiscal & monetary policy

 Fiscal Policy is made for a short duration, normally one year, while the
Monetary Policy lasts longer. Fiscal Policy gives direction to the economy.
On the other hand, Monetary Policy brings price stability.

 Fiscal Policy is concerned with government revenue and expenditure, but

Monetary Policy is concerned with borrowing and financial arrangement.

 The major instrument of fiscal policy is tax rates and government spending.
Conversely, interest rates and credit ratios are the tools of Monetary Policy.

 Political influence is there in fiscal policy. However, this is not in the case of
monetary policy.

 Fiscal Policy is carried out by the Ministry of Finance whereas the Monetary
Policy is administered by the Central Bank of the country.

Which is more effective MONETARY or FISCAL

policy?
 Monetary policy is set by the Central Bank, and therefore reduces political
influence whereas Fiscal policy can have more supply side effects on the
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wider economy. E.g. to reduce inflation- higher tax and lower spending
would not be popular, and the government may be reluctant to pursue this.

 Monetarists argue expansionary fiscal policy (larger budget deficit) is likely

to cause crowding out Expansionary fiscal policy (e.g. more government
spending) may lead to special interest groups pushing for spending which
isn't really helpful and then proves difficult to reduce when the recession is
over
 Monetary policy is quicker to implement. Interest rates can be set every
month. A decision to increase government spending may take time to decide
where to spend the money.
 Monetary policy in a planned economy of India cannot be framed
independently of fiscal policy as achieving growth with price stability are
the objectives of both these policies.