Macroeconomic policy instruments

From Wikipedia, the free encyclopedia

Macroeconomic policy instruments refer to macroeconomic quantities that can be directly

controlled by an economic policy maker.  Instruments can be divided into two subsets:
[1][2]

a) Monetary policy instruments and b) Fiscal policy instruments. Monetary policy is conducted by

the Federal Reserve or the central bank of a country or supranational region (Euro zone). Fiscal
policy is conducted by the Executive and Legislative Branches of the Government and deals with
managing a nation’s Budget.

Contents
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 1 Monetary policy
 2 Fiscal policy
 3 History
 4 References

Monetary policy[edit]
Monetary policy instruments consists in managing short-term rates (Fed Funds and Discount
rates in the U.S.), and changing reserve requirements for commercial banks. Monetary policy
can be either expansive for the economy (short-term rates low relative to inflation rate) or
restrictive for the economy (short-term rates high relative to inflation rate). Historically, the major
objective of monetary policy had been 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.

Fiscal policy[edit]
Fiscal policy consists in managing the national Budget and its financing so as to influence
economic activity. This entails the expansion or contraction of government expenditures related
to specific government programs such as building roads or infrastructure, military expenditures
and social welfare programs. It also includes the raising of taxes to finance government
expenditures and the raising of debt (Treasuries in the U.S.) to bridge the gap (Budget deficit)
between revenues (tax receipts) and expenditures related to the implementation of government
programs. Raising taxes and reducing the Budget Deficit is deemed to be a restrictive fiscal
policy as it would reduce aggregate demand and slow down GDP growth. Lowering taxes and
increasing the Budget Deficit is considered an expansive fiscal policy that would increase
aggregate demand and stimulate the economy.