Question

(1) How can policy makers use their policy instruments to achieve their domestic policy goals?

(2) Explain how macro-policy can be used to combat the problems of recession and problems of overheating.

Answer 1

Answer 1.. The domestic policy goals fof poilicy makers are Full employment,Price stability,Economic growth etc. The two.major.policy instruments are monetary policy and fiscal.policy. These two policies are employed toward altering aggregate demand so as to bring about a change in aggregate output (GNP/GDP) and prices, wages and interest rates, etc., throughout the economy.

Monetary policy is policy where the central bank control the supply of money as an instrument for achieving the macroeconomic goals. It includes varying the following variables to meet the needs of economy

Bank rate

Open market operation

Reserve ratio

Selective credit controls

Fiscal policy, aims at influencing aggregate demand by altering tax- expenditure-debt programme of the government. Its main componets are varying which it meet needs of economy

Government expenditure

Government tax revenue( Tax policies)

Policy makers use these variables to achieve the goals of domestic economy

B) recession occurs whenfalling employment, output, income, prices, and interest rates. Most significantly, recessions are marked by rising unemployment. On other hand overheating occurs when economy suffer rising prices and interest rates, until it reaches a turning point

Fiscal policy instrument

a recession requires deficit spending while an overheated expansion requires a budget surplus.

Discretionary Fiscal Policy.

It is used mostlty in severe recession

Automatic Stabilizers.

A second type of fiscal policy is built into the structure of federal taxes and spending.

The progressive income tax and the welfare system both act to increase aggregate demand in recessions, and to decrease aggregate demand in overheated expansions. These automatic changes in spending and taxes will generate a deficit in recessions and a surplus in overheated expansions

Monetary policy

In a recession, the policy maker will lower interest rates and increase the money supply. In an overheated expansion, they will raise interest rates and decrease the money supply.

. As boom times threaten to overheat the economy and cause inflation, the policy makers pursues contractionary monetary policy, taking money out of the system and raising interest rates. During a recession, they desires to spur the economy with an expansionary monetary policy, adding money to the system and lowering interest rates.