Course Title:

Macroeconomics
Class BSAF, 4th Semester
Instructure
Dr. Haidar Farooqe
haidarfarooqe@numl.edu.pk
Lecture# 3
Faculty of Management Sciences,
National University of Modern Languages, Islamabad
 Topic
Macroeconomic policies
 Lecture Contents
 The aim of macroeconomic policy

 Types of macroeconomic policy

 Fiscal policy

 Monetary policy
 The aims of macroeconomic policy
• Governments seek to achieve price stability, low and stable inflation
and to achieve inflation targets
• To maintain the confidence and expectation of the firms, household
and workers
• Governments may have different aims for the balance of payments
• To increase and encourage foreign direct investment
• To achieve employment targets
• Increase the output level
• To achieve sustainable economic growth
• To achieve exchange rate targets
• To promote moderate long-term interest rates.
 Fiscal policy
• Fiscal policy is the use of taxation and government spending to
manage aggregate demand in order to achieve the government’s
macroeconomic aims.
• Fiscal policy is the means by which a government adjusts its spending
levels and tax rates to monitor and influence a nation's economy.
• Fiscal policy plays a very important role in managing a country's
economy.
• 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.
 Tools of fiscal policy
• The first tool is taxation. That tax includes income tax, taxes on capital
or businesses, property tax and sales tax.
• The second tool is government spending, which includes subsidies,
public works projects, and government salaries. Whoever receives the
funds has more money to spend, which increases demand and
economic growth.
• Government transfer payments (expenditures on welfare, financial
aid, social security and government subsidies).
 1. Expansionary fiscal policy
• Expansionary fiscal policy is designed to increase aggregate demand.
This can be achieved by a government increasing its spending or
cutting tax rates.
• The most widely-used is expansionary, which stimulates economic
growth and mostly used for relief from a recession. The government
either spends more, cuts taxes, or both.
• The idea is to put more money into consumers' hands, so they spend
more. The increased demand forces businesses to add jobs to
increase supply.
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• Expansionary fiscal policy is to be adopted when economy is in
“Recession” and government want to increase the aggregate demand
• Expansionary fiscal policy is based in following three points
 Increase in government spending's in the form of (highways,
motorways, airports, seaports, railways, educational institution,
universities and other construction related industries.
A reduction in tax rate (A reduction in direct taxes and indirect taxes)
Increase in government transfer payments (expenditures on welfare,
financial aid, social security and government subsidies.
 2. Contractionary fiscal policy
• In contractionary fiscal policy is intended to lower aggregate demand.
This time, the government will reduce its spending or increase taxes.
• The contractionary fiscal policy is used, when the economy is facing
inflationary pressure.
• Contractionary fiscal policy is used rarely
• The long-term impact of inflation can damage the standard of living as
much as a recession.
• The tools of contractionary fiscal policy are used in reverse.
Taxes are increased and
Government will reduce spending's.
Decrease in transfer payments
 Monetary Policy
Monetary policy changes the nation's money supply to influence
macroeconomics performance, including unemployment, inflation and
economic growth.
Monetary policy is conducted by the nation's central bank. Changes in
the money supply relative to its demand affect financial markets,
including interest rate and exchange rates. These changes alter
investment, consumption and net exports, which in turn influence
macroeconomics performance.
Monetary policy, the demand side of economic policy, refers to the
actions undertaken by a nation's central bank to control money supply
to achieve macroeconomic goals that promote sustainable economic
growth.
Tools of Monetary policy
• Money supply
Currency circulation, Demand deposit
• Interest rate
 Types of Monetary Policy
• Central banks use contractionary monetary policy to reduce inflation.
They reduce the money supply by restricting the volume of money
banks can lend. The banks charge a higher interest rate, making loans
more expensive. Fewer businesses and individuals borrow, slowing
growth.
• Central banks use expansionary monetary policy to lower
unemployment and avoid recession. They increase liquidity by giving
banks more money to lend. Banks lower interest rates, making loans
cheaper. Businesses borrow more to buy equipment, hire employees,
and expand their operations. Individuals borrow more to buy more
homes, cars, and appliances. That increases demand and spurs
economic growth.
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