Macroeconomic policy instruments(宏观经济政策工具)

  Macroeconomic policy instruments fall within the realm of Macroeconomics policy. The latter can be divided into two subsets: a) Monetary policy <货币政策>and b) Fiscal policy<财政政策>. Monetary policy is conducted by the Federal Reserve <联邦储备>or the central bank of a country or supranational region (Euro zone). Fiscal policy is conducted by the Executive and Legislative Branches of the Government and deals with managing a nation’s Budget.


  Monetary policy:



  Monetary policy instruments consists in managing short-term rates (Fed Funds and Discount rates in the U.S.)<联邦基金和美国折扣率>, and changing reserve requirements for commercial banks. Monetary policy can be either expansive for the economy (short-term rates low relative to inflation rate) or restrictive for the economy (short-term rates high relative to inflation rate). Historically, the major objective of monetary policy had been to manage or curb domestic inflation. More recently, central bankers have often focused on a second objective: managing economic growth as both inflation and economic growth are highly interrelated.


Fiscal policy:


Fiscal policy consists in managing the national Budget<预算> and its financing<融资> so as to influence economic activity. This entails the expansion or contraction of government expenditures related to specific government programs. It also includes the raising of taxes to finance government expenditures and the raising of debt (Treasuries in the U.S.) to bridge the gap (Budget deficit) between revenues (tax receipt) and expenditures related to the implementation of government programs. Raising taxes and reducing the Budget Deficit is deemed to be a restrictive fiscal policy as it would reduce aggregate demand and slow down GDP growth. Lowering taxes and increasing the Budget Deficit is considered an expansive fiscal policy that would increase aggregate demand and stimulate the economy.

objectives of government macroeconomic policy

  The four major objectives are (i) full employment, (ii) price stability, (iii) a high, but sustainable, rate of economic growth, and (iv) keeping the Balance of Payments in equilibrium. First, we will look at the way in which these objectives are measured. Secondly, we shall discuss the relative importance of these objectives. Thirdly, we shall see how successful recent governments have been in achieving these goals. Finally, we will look at the difficulties that governments have in trying to achieve all the objectives at once.

  1. Full employment, or low unemployment
  The claimant count is the older, more out of date measure of unemployment used in the UK. Those counted must be out of work, physically able to work and looking for it, and actually claiming benefit.
  For a more realistic count, and for international comparisons, the ILO (International Labour Organisation) measure is used. This includes the young unemployed who are not always eligible to claim, married women who can't claim if their husband is earning enough, and those who claim sickness and invalidity benefits. Many only slightly inconvenienced unemployed workers are paid these benefits rather than swell the unemployment numbers.
  Note the issue of active and inactive members of the population of working age. Only those who are active are included in the working population, which is defined as all those who are employed or registered unemployed. But some of the inactive are in this category by choice, for instance, students and those who retire early.

  2. Price stability

  Inflation is usually defined as a sustained rise in the general level of prices. Technically, it is measured as the annual rate of change of the Retail Price Index (RPI), often referred to as the headline rate of inflation. For prices to be stable, therefore, the inflation rate should be zero. Generally, governments are happy if they can keep the inflation rate down to a low percentage. For an explanation of how the RPI is formulated, see later. The UK government prefers to target the underlying rate of inflation, or the annual percentage change in the RPIX. This is the same as the RPI except housing costs are removed in the shape of mortgage interest payments. It makes sense for the government to use this measure because the weapon they use to control inflation, interest rates, directly affects the RPI itself.
  Other less popular measures include the RPIY, which takes RPIX a stage further by also taking out the effects of indirect taxation (e.g. VAT), and the consumer price index, which is often used when making international comparisons.

  3. High (but sustainable) economic growth

  Economic growth tends to be measured in terms of the rate of change of real GDP (Gross Domestic Product). When the word real accompanies any statistic, it means that the effects of inflation have been removed. More on this later! GDP is a measure of the annual output (or income, or expenditure) of an economy. Much more on this later! Sometimes GNP (Gross National Product) is used, which is very similar to GDP. Growth figures are published quarterly, both in terms of the change quarter on quarter and as annual percentage changes.

  4. Balance of Payments in equilibrium

  Briefly, this records all flows of money into, and out of, the UK. It is split into two: the Current Account and the Capital and Financial Accounts (formerly the capital account).
  Probably the most important is the Current Account because this records how well the UK is doing in terms of its exports of goods and services relative to its imports. If the UK is to 'pay its way' in the world over the long term, then it needs to keep earning enough foreign currency from its exports to pay for its imports. If this is not the case, the account will be in deficit. Japan has the largest surplus in the world. Although a surplus sounds better then a deficit, both can be bad. Japan's surplus forces other countries in the world to have deficits. In fact, while Japan's surplus is the biggest in the world, the USA's deficit is the biggest in the world. This is not a coincidence! The UK tends to be in deficit, although the Current Account was in surplus a couple of years ago, mainly due our strength in the service sector.

The Aggregate Demand and Aggregate Supply Model

Changes in the following non-price level factors or determinants cause changes in aggregate demand and shifts of the entire aggregate demand (AD) curve.

Autonomous consumption (autonomous consumer spending) Ca, which depends upon:

-consumer nominal wealth
-consumer expectations and confidence concerning job security and future income
-money supply
-autonomous taxes Ta (e.g., sales and property taxes)
Planned investment spending I, which depends upon:

-real interest rates (i.e., changes in interest rates not caused by changes in the price level)
-business profit expectations or the expected rate of return
-business taxes
-money supply

Government spending G:

Net export spending X:

Changes in the following factors will change SR and LR aggregate supply and shift the SRAS and LRAS curves:

Resource endowments
Permanent changes in international trade barriers in resource markets
Technology and education
Permanent changes in business regulations and taxes


Temporary or short run changes in input prices and resource costs will shift the SRAS curve without changing the full employment level of real GDP and shifting the LRAS curve.

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DEMAND CURVE SHIFTS .....WITH TAX

This curve shows the changing in the demand curve after tax...we can see that because the putting tax into the product,therefore the price will increase from p1to p2 and the demand curve shifts to the left,and because the price rises and the price elasticity of demand is elastic,people may not buy the products therefore the quantity fall from q1to q2

About Inflation

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is the destruction of the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.Fixed constant real value non-monetary items never maintained are treated like monetary items under historical cost accounting. Consequently their real values are destroyed at a rate equal to the rate of inflation because inflation destroys the real value of money which is the monetary unit of account. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.



Inflation can have positive and negative effects on an economy. Negative effects of inflation include loss in stability in the real value of money and other monetary items over time; uncertainty about future inflation may discourage investment and saving, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include a mitigation of economic recessions,and debt relief by reducing the real level of debt.


Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.


Today, most mainstream economists favor a low steady rate of inflation.Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents monetary policy from stabilizing the economy.The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.