This can result in an inflation bias—that is, higher inflation outcomes brought on solely by the lack of policy credibility itself. A right shift in the aggregate supply curve means that the quantity of goods and services supplied will increase at a particular price level. A standard critique has been that, although the use of a nominal anchor may improve inflation performance, it comes at the cost of reducing the discretion of the authorities to respond to short-run shocks. Inflation, for example, is a regressive and arbitrary tax, the burden of which is typically borne disproportionately by those in lower income brackets. Hence the need for additional policy measures like income policy, price control, etc. The government uses these factors and models to help develop its own economic policies. Some monopolistic activities previously targeted by antitrust authorities, such as predatory pricing and exclusive marketing agreements, were much less harmful to consumers than had been thought in the past.
For a recent analysis, see Deaton and Paxson 2000. The structural features of the economy may also affect the impact a particular shock has on the economy, as well as the insulating properties of exchange rate regimes. If one person, firm or country can produce more of something with the same amount of effort and resources, they have an absolute advantage over other producers. In practice, given the complexities of the economy and its exposure to international influences, the simultaneous achievement of all these objectives is virtually impossible, so that a degree of prioritizing is required. However, although monetary and exchange rate policies may affect the poor through all of these channels, the monetary authorities cannot necessarily control the size and nature of the resulting impact.
Three major concepts studied in macroeconomics include economic output, unemployment and inflation and deflation. Given that it is difficult to determine beforehand what the growth target should be, policymakers may wish to consider developing alternative macroeconomic scenarios that take into consideration possible variations in the rate of economic growth. In a capitalist market-based society some people get more than others. Since different exchange rate regimes have different insulating properties vis-à-vis certain types of shocks, choosing the regime that best insulates the economy will serve to moderate fluctuations in output, and thereby best serve the poor. Therefore, countries that wish to target a significantly lower rate of inflation need to ensure that the corresponding fiscal adjustment is adequate. However, it is difficult again to define the permissible or reasonable rate of inflation. In some cases, it may be appropriate to delay reforms until adequate safety net measures can be put in place.
Such a fiscal stance increases the demand for domestic goods, which, in the absence of a corresponding increase in supply, puts upward pressure on their prices. In some countries, fixed exchange rate regimes have clearly been effective in establishing and maintaining low inflation. Later, Milton Friedman developed another well-known macroeconomic school of thought, called , which rejected Keynes's fiscal policy idea and stated instead that regulating the money supply was the key to economic stability. Household survey data for a number of countries indicate that the poor tend to consume higher amounts of nontradable goods while generating relatively more of their income from tradable goods Sahn, Dorosh, and Younger, 1997. Economic Policy An economic policy is a course of action that is intended to influence or control the behavior of the economy. Identifying whether a particular shock is temporary or is likely to persist is easier said than done. If the short-term aggregate supply curve shifts to the left, output will fall and prices will rise - this is called stagflation.
Specific sectors, industries, markets, or demographics are targeted by this specific type of economic policy. Although it is difficult to prove the direction of causation, these results confirm that macroeconomic instability has generally been associated with poor growth performance. To do so, policymakers need to integrate their poverty reduction and macroeconomic strategies into a consistent framework. The tables reveal that many developing countries are in a state of macroeconomic stability. It may be noted here that a free enterprise capitalist economy always exhibits full employment. Inappropriate exchange rate policies distort the composition of growth by influencing the price of tradable versus nontradable goods.
By pursuing sound economic policies, policymakers send clear signals to the private sector. Further, it does not wish to combat inflation or deflation by means of active demand management as in Keynesian economics, but by means of rules, such as keeping the rate of growth of the money supply constant over time. Macroeconomic policies To try to avoid major economic shocks, such as The Great Depression, governments make adjustments through policy changes they hope will stabilize the economy. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. Li, Hongyi, Danyang Xie, Heng-fu Zou, 1999.
If the variable threatens to deviate from its targeted path the authorities take corrective action. In this regard, policymakers should consider the extent to which both technical assistance and the private sector can play a role in improving the delivery of these services. Is there scope for cutting back certain priority spending without undermining the poverty reduction objective? The precise cause of the crisis remains a matter of debate. First, there needs to be an assessment of the appropriate policy stance to adopt in a given set of circumstances i. In view of this conflict, it is said that macroeconomic policy should promote economic growth with reasonable price stability. If properly managed, financial liberalization policies can therefore have the additional benefit of increasing self-insurance for the poor.
It fused and extended the earlier study of business fluctuations and. Exiting a fixed regime once inflation performance is satisfactory can be difficult. Functions Okay, you now know the definition of economic policy, but you may be wondering how the government influences the economy. These relationships, however, need not necessarily be in exact balance. One area involves the process of understanding the causation and consequences of short-term fluctuations in national income, also known as the. Various general measures can be employed by governments to achieve their objectives, including the manipulation of tax rates and government expenditure , the control of the money supply and interest rates , controls on costs and prices and the management of the to influence the country's external trade and payments position.
The pursuit of purely economic objectives by governments needs to be tempered by the various value judgements or views that governments hold about, for example, the most appropriate distribution of income between citizens see and the effects of their policies on particular subgroups within the community and the desirability of helping some groups at the expense of others. Under a monetary anchor, the authorities cannot pursue an exchange rate target. Given that at any point in time there is a finite amount of credit available in an economy, policymakers must therefore assess the relative productivity of public investment versus private investment and determine the amount of domestic budgetary financing that would be consistent with the need to maintain low inflation and support sustainable economic growth. In this regard, quantitative frameworks that could assist policymakers in assessing the distributional implications of their macroeconomic policies would be particularly useful. Inflation and Deflation Inflation and deflation are also important concepts studied in macroeconomics. Depreciation allowances should be uniform across sectors, and there should be minimal use of tax incentives other than permitting net operating losses to be carried forward for some reasonable period of time. For example, countries that have targeted the real exchange rate have generally had worse inflation performance than other countries.
Others have suggested that greater equity comes at the expense of lower growth and that there is a trade-off between growth and equity when it comes to poverty reduction. Along with , macroeconomics is one of the two most general fields in. Some economic models in the field of assume that self-interested individuals behave altruistically because they get some benefit, or , from doing so. In the long run, however, only policies to which the authorities are fully committed can be credible. Individuals are typically broken down into subgroups, such as buyers, and business owners. Once this has been accomplished, similar exercises could be carried out regarding the other contingency scenarios for reference during the implementation stage of the strategy. Macroeconomists develop models that explain the relationship between such factors as , , , , , , , and.