Macroeconomics and Fiscal Policy

Macroeconomics

• Study of economy-wide phenomena, such as:
  • GDP (Gross Domestic Product)
  • Inflation
  • Unemployment
  • Economic growth
  • Business cycles
• Macroeconomists focus on understanding the behavior of aggregate variables, such as:
  • Aggregate demand and supply
  • National income and output
  • Price level and inflation rate

Fiscal Policy

• Use of government spending and taxation to influence the overall level of economic activity
• Tools:
  • Government expenditures (G)
  • Taxation (T)
  • Transfer payments (e.g. social security benefits)
• Fiscal policy goals:
  • Stabilize economy during recessions or booms
  • Achieve full employment
  • Reduce poverty and inequality
  • Promote economic growth
• Fiscal policy types:
  • Expansionary fiscal policy: increase G, decrease T to stimulate economy
  • Contractionary fiscal policy: decrease G, increase T to slow down economy

Monetary Policy

• Use of money supply and interest rates to influence economic activity
• Conducted by central banks (e.g. Federal Reserve in the US)
• Tools:
  • Open market operations (buying or selling government bonds)
  • Reserve requirements (regulating banks' reserve levels)
  • Discount rate (interest rate on loans to banks)
• Monetary policy goals:
  • Control inflation
  • Maintain economic growth
  • Stabilize financial system
  • Achieve low unemployment
• Monetary policy types:
  • Expansionary monetary policy: increase money supply, lower interest rates to stimulate economy
  • Contractionary monetary policy: decrease money supply, raise interest rates to slow down economy

Macroeconomics

• Examines economy-wide phenomena, including:
  • GDP (total value of goods and services produced within a country's borders)
  • Inflation (rate of change in prices of goods and services)
  • Unemployment (number of people unable to find work)
  • Economic growth (increase in production of goods and services)
  • Business cycles (fluctuations in economic activity)
• Focuses on understanding aggregate variables, including:
  • Aggregate demand (total amount of goods and services demanded by households, businesses, and government)
  • Aggregate supply (total amount of goods and services produced by businesses)
  • National income and output (total value of goods and services produced)
  • Price level and inflation rate (general level of prices and rate of change)

Fiscal Policy

• Utilizes government spending and taxation to influence economic activity
• Tools include:
  • Government expenditures (federal, state, and local government spending)
  • Taxation (levying taxes on individuals and businesses)
  • Transfer payments (social security benefits, welfare, etc.)
• Goals:
  • Stabilize economy during recessions or booms
  • Achieve full employment (when all available labor resources are utilized)
  • Reduce poverty and inequality
  • Promote economic growth
• Types:
  • Expansionary fiscal policy: increases government spending, cuts taxes to stimulate economy
  • Contractionary fiscal policy: decreases government spending, increases taxes to slow down economy

Monetary Policy

• Regulates money supply and interest rates to influence economic activity
• Conducted by central banks (e.g., Federal Reserve in the US)
• Tools include:
  • Open market operations (buying or selling government bonds to increase or decrease money supply)
  • Reserve requirements (regulating banks' reserve levels to influence lending)
  • Discount rate (interest rate on loans to banks)
• Goals:
  • Control inflation
  • Maintain economic growth
  • Stabilize financial system
  • Achieve low unemployment
• Types:
  • Expansionary monetary policy: increases money supply, lowers interest rates to stimulate economy
  • Contractionary monetary policy: decreases money supply, raises interest rates to slow down economy