Question

What is the policy mix? Explain . How can policy makers use their policy instruments to achieve their domestic policy goals? In your answer explain how macro-policy can be used to combat the problems of recession, overheating, and stagflation.

Answer 1

Policy Mix: The policy mix blends monetary and fiscal policies in a country. These two channels have an impact on growth and employment and are controlled by the central bank and the government in general (e.g. the US Congress).

Domestic Policy Goals:

The domestic policy covers a broad variety of areas such as industry, education, energy, healthcare, law enforcement, tax and revenue, natural resources, welfare, human rights and liberties.

In 1993, the Executive Order established the "Domestic Politic Committee," as it is now called. The Domestic Policy Council, established under President Bush, supervises main domestic programs, including education, health, housing, healthcare, justice, federalism, transport, climate, employment, and veteran affairs.

The policy instrument is a method for controlling an economic variable in order to achieve an economic objective. Profit, tax, subsidies, minimum wages and prices as well as regulations are included in the instrument.

Macro Policy:

Macro Policy is a policy that affects the entire nation. It discusses factors in terms of political, fiscal, commerce and exchange rates and economic development, inflation and the levels of domestic employment.

The use of monetary or fiscal policy adjustments to stimulate demand during a recession is economic stimulus. Governments will do so with policies such as lower interest rates, higher budget expenditure and quantitative easing, among others.

Fiscal policy could be more successful than monetary policy in a serious recession and liquidity trap, as the government may pay the economy for new investment programs, creating employment directly, rather than implicitly encouraging business to invest in monetary policy.

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