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Faculties and Departments => Economics in Business => Business Administration => Business & Entrepreneurship => Macroeconomics => Topic started by: bipasha on July 17, 2018, 10:23:48 AM

Title: Macroeconomic Policy: Objectives and Instruments
Post by: bipasha on July 17, 2018, 10:23:48 AM
Microeconomics and macroeconomics—the two major divisions of economics—have different objectives to be pursued.

The key microeconomic goals are the efficient use of resources that are employed and the efficient distribution of output.

These two goals of microeconomics are encapsulated as ‘efficiency’ and ‘equity’.


But macroeconomic goals are quite different because the overall response of the economy must not match with the individual units. As macroeconomics looks at the whole, its objectives are aggregative in character. In other words, because of different level of aggregation, these two branches of economics focuses on different economic objectives.

1. Macroeconomic Policy Objectives:
The macroeconomic policy objectives are the following:

(i) Full employment,

(ii) Price stability,


(iii) Economic growth,

(iv) Balance of payments equilibrium and exchange rate stability, and

(v) Social objectives.

(i) Full employment:
Performance of any government is judged in terms of goals of achieving full employment and price stability. These two may be called the key indicators of health of an economy. In other words, modern governments aim at reducing both unemployment and inflation rates.

Unemployment refers to involuntary idle­ness of mainly labour force and other produc­tive resources. Unemployment (of labour) is closely related to the economy’s aggregate output. Higher the unemployment rate, greater the divergence between actual aggre­gate output (or GNP/CDP) and potential out­put. So, one of the objectives of macroeco­nomic policy is to ensure full employment.

The objective of full employment became uppermost amongst the policymakers in the era of Great Depression when unemployment rate in all the countries except the then social­ist country, the USSR, rose to a great height. It may be noted here that a free enterprise capi­talist economy always exhibits full employ­ment.

But, Keynes said that the goal of full employment may be a desirable one but im­possible to achieve. Full employment, thus, does not mean that nobody is unemployed. Even if 4 or 5 p.c. of the total population re­main unemployed, the country is said to be fully employed. Full employment, though theoretically conceivable, is difficult to attain in a market-driven economy. In view of this, full employment objective is often translated into ‘high employment’ objective. This goal is desirable indeed, but ‘how high’ should it be? One author has given an answer in the fol­lowing way; “The goal for high employment should therefore be not to seek an unemploy­ment level of zero, but rather a level of above zero consistent with full employment at which the demand for labour equals the supply of labour. This level is called the natural rate of unemployment.”

(ii) Price stability:
No longer the attain­ment of full employment is considered as a macroeconomic goal. The emphasis has shifted to price stability. By price stability we must not mean an unchanging price level over time. Not necessarily, price increase is unwel­come, particularly if it is restricted within a reasonable limit. In other words, price fluc­tuations of a larger degree are always unwel­come.

However, it is difficult again to define the permissible or reasonable rate of inflation. But sustained increase in price level as well as a falling price level produce destabilising ef­fects on the economy. Therefore, one of the objectives of macroeconomic policy is to en­sure (relative) price level stability. This goal prevents not only economic fluctuations but also helps in the attainment of a steady growth of an economy.

(iii) Economic growth:

Economic growth in a market economy is never steady. These economies experience ups and downs in their performance. This objective became uppermost in the period following the World War II (1939-45). Economists call such ups and downs in the economic performance as trade cycle/business cycle. In the short run such fluctuations may exhibit depressions or prosperity (boom).

One of the important benchmarks to measure the performance of an economy is the rate of increase in output over a period of time. There are three major’ sources of economic growth, viz. (i) the growth of the labour force, (ii) capital formation, and (iii) technological progress. A country seeks to achieve higher economic growth over a long period so that the standards of living or the quality of life of people, on an average, improve. It may be noted here that while talking about higher economic growth, we take into account general, social and environmental factors so that the needs of people of both present generations and future generations can be met.

However, promotion of higher economic growth is often hampered by short run fluctuations in aggregate output. In other words, one finds a conflict between the objectives of economic growth and economic stability (in prices). In view of this conflict, it is said that macroeconomic policy should promote economic growth with reasonable price stability.

(iv) Balance of payments equilibrium and exchange rate stability:
From a macro- economic point of view, one can show that an international transaction differs from domestic transaction in terms of (foreign) currency exchange. Over a period of time, all countries aim at balanced flow of goods, services and assets into and out of the country. Whenever this happens, total international monetary reserves are viewed as stable.

If a country’s exports exceed imports, it then experiences a balance of payments surplus or accumulation of reserves, like gold and foreign currency. When the country loses reserves, it experiences balance of payments deficit (or imports exceed exports). However, depletion of reserves reflects the unhealthy performance of an economy and thus creates various problems. That is why every country aims at building substantial volume of foreign exchange reserves.

Anyway, the accumulation of foreign exchange reserves is largely conditioned by the exchange rate the rate at which one currency is exchanged for another currency to carry out international transactions. The foreign exchange rate should be stable as far as possible. This is what one may call it external stability in price.

External instability in prices hampers the smooth flow of goods and services between nations. It also erodes the confidence of currency. However, maintenance of external stability is no longer considered as the macroeconomic policy objective as well as macroeconomic policy instrument.

It is, however, because of growing inter- connectedness and interdependence between different nations in the globalised world, the task of fulfilling this macroeconomic policy objective has become more problematic.

(v) Social objectives:
The list of objectives that we have referred here is by no means an exhaustive one; one can add more in the list. Even then we have incorporated the major ones.

Macroeconomic policy is also used to attain some social ends or social welfare. This means that income distribution needs to be more fair and equitable. In a capitalist market-based society some people get more than others. In order to ensure social justice, policymakers use macroeconomic policy instruments.

We can add another social objective in our list. This is the goal of economic freedom. This is characterised by the right of taking economic decisions by any individual (rich or poor, high caste or low caste).

2. Macroeconomic Policy Instruments:
As our macroeconomic goals are not typically confined to “full employment”, “price stability”, “rapid growth”, “BOP equilibrium and stability in foreign exchange rate”, so our macroeconomic policy instruments include monetary policy, fiscal policy, income policy in a narrow sense. But, in a broder sense, these instruments should include policies relating to labour, tariff, agriculture, anti-monopoly and other relevant ones that influence the macroeconomic goals of a country. Confining our attention in a restricted way we intend to consider two types of policy instruments the two “giants of the industry” monetary (credit) policy and fiscal (budgetary) 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 attempts to stabilise aggregate demand in the economy by influencing the availability or price of money, i.e., the rate of interest, in an economy.

Monetary policy may be defined as a policy employing the central bank’s control of the supply of money as an instrument for achieving the macroeconomic goals.

Fiscal policy, on the other hand, aims at influencing aggregate demand by altering tax- expenditure-debt programme of the government. The credit for using this kind of fiscal policy in the 1930s goes to J.M. Keynes who discredited the monetary policy as a means of attaining some of the macro- economic goals—such as the goal of full employment.

As fiscal policy has come into scrutiny in terms of its effectiveness in achieving the desired macroeconomic objectives, the same is true about the monetary policy. One can see several rounds of ups and downs in the effectiveness of both these policy instruments consequent upon criticisms and counter- criticisms in their theoretical foundations.

It may be pointed out here that as there are conflicts among different macroeconomic goals, policymakers are in a dilemma in the sense that neither of the policies can achieve desired goals. Hence the need for additional policy measures like income policy, price control, etc. Further, while the objectives represent economic, social and political value judgements they do not normally enter the mainstream economic analysis. Ultimately, policymakers and bureaucrats are blamed as troubleshooters.

Title: Re: Macroeconomic Policy: Objectives and Instruments
Post by: Raisa on July 22, 2018, 12:40:24 PM
good one