Can someone ELI5 to me macroeconomic / microeconomic policies (1 Viewer)
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Both macro and micro are policy responses to economic issues (growth, inflation, unemployment, external stability, income distribution and environmental sustainability). Macro policies are concerned with influencing aggregate demand through the use of fiscal policy, the manipulation of government taxation and expenditure, and monetary policy, the manipulation of the cash rate. Contrastingly, microeconomic policies are measures to increase aggregate supply by improving the efficiency and productivity of industries and firms.
Both macro and micro help to improve the state of the economy however, macro is thought to be more suited for addressing shorter term goals and cyclical factors whereas micro is aimed at longer term objectives and structural components. During the GFC, for instance, expansionary macroeconomic policy was undertaken through the government's injection of funds in the Australian economy (with G>T) and a loosening of monetary policy (from 7.25 to 3%?) to encourage consumer spending and business investment. This helped to alleviate the effects of the global collapse for Australia as seen in our above trend growth rate relative to other developed economies. However not all economic issues can be addressed this way. For example, the NAIRU, which represents the limitations of macro policies in simultaneously achieving low unemployment and inflation, requires the use of micro policies such as labour market reforms.
Both macro and micro help to improve the state of the economy however, macro is thought to be more suited for addressing shorter term goals and cyclical factors whereas micro is aimed at longer term objectives and structural components. During the GFC, for instance, expansionary macroeconomic policy was undertaken through the government's injection of funds in the Australian economy (with G>T) and a loosening of monetary policy (from 7.25 to 3%?) to encourage consumer spending and business investment. This helped to alleviate the effects of the global collapse for Australia as seen in our above trend growth rate relative to other developed economies. However not all economic issues can be addressed this way. For example, the NAIRU, which represents the limitations of macro policies in simultaneously achieving low unemployment and inflation, requires the use of micro policies such as labour market reforms.
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Ekman
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Lol this is practically all of topic 4
So the government has 2 tools in their power they can use to influence the economy. Why you may ask? Because of the 6 main macroeconomic objectives they wish to achieve. These objectives allow the economy to prosper. As you might of guessed, these objectives are; Economic growth, Price stability (aka inflation), unemployment, distribution of income, external stability, and environmental sustainability.
So the 2 tools that the government uses are; macroeconomic and microeconomic policies.
The two macroeconomic policies are: Fiscal and Monetary Policy
Fiscal policy: It is the main governmental tool used to reduce fluctuations in the business cycle and achieve macro objectives, through changes in taxation and government spending. The Budget is an indicator of the government's expenditure and revenue. Changes in the budget or budget outcome are caused by both discretionary and non-discretionary changes. Discretionary changes involves the deliberate changes in the budget stance (for example, the budget stance used to be expansionary till the 2010-11 budget, where it changed to become contractionary). Whilst non-discretionary changes characterises the counter-cyclical ability of the budget in order to smoothen out fluctuations. The non-discretionary changes are made up of automatic stabilisers, known as the progressive income tax and transfer payments. These inbuilt stabilisers work by balancing out one another (for example, an economy that is going really bad, will have more transfer payments, as there would be more unemployed. These unemployed people will eventually spend this money from the transfer payments, causing a stimulation in the economic growth, resulting in more jobs being made due to the increase in aggregate demand, and hence more people are employed. If there are more people employed then the income tax will tax more money, and eventually repeat this same cycle). You can refer to the textbook about how fiscal policy achieves the macro objectives as it would be too long for me to type, I only explained the basics or mechanics behind the policy.
Monetary Policy: It is the policy implemented by the Reserve Bank, that is used to change the availability of money in the economy, through changes in interest/cash rates. The monetary policy works via DMO's (Domestic Market Operations), where the Reserve Bank buys or sells government securities to influence the level of funds in the Short Term Money Market. This market is accessed by domestic banks via Exchange Settlement accounts. As the level of funds influence the interest rates of banks, the Reserve Bank can hence influence the level of funds in entire economy. The only objectives the monetary policy addresses is economic growth, inflation and unemployment. Refer to textbook about how these objectives are achieved.
Microeconomics: These are policies implemented by the government, in order to increase aggregate supply, hence increasing economic growth and development. They do this via improving the efficiency and productivity of producers. The impact of microeconomics involves mainly structural change, as the microeconomic policies aim to influence the allocation of resources. These policies mainly target both factor and product markets. They target factor markets through subsidies or training programs, in order to improve the efficiency of labour and resources, as well as improving the 3 types of efficiency (allocative, technical and dynamic). They target product markets through privatisation, corporatisation, implementing the National Competition Policy, and I guess protection such as tariffs and subsidies. These policies aim to impact the level of aggregate supply. Labour markets is a major part of microeconomics, so I recommend that you refer to the textbook about that.
So the government has 2 tools in their power they can use to influence the economy. Why you may ask? Because of the 6 main macroeconomic objectives they wish to achieve. These objectives allow the economy to prosper. As you might of guessed, these objectives are; Economic growth, Price stability (aka inflation), unemployment, distribution of income, external stability, and environmental sustainability.
So the 2 tools that the government uses are; macroeconomic and microeconomic policies.
The two macroeconomic policies are: Fiscal and Monetary Policy
Fiscal policy: It is the main governmental tool used to reduce fluctuations in the business cycle and achieve macro objectives, through changes in taxation and government spending. The Budget is an indicator of the government's expenditure and revenue. Changes in the budget or budget outcome are caused by both discretionary and non-discretionary changes. Discretionary changes involves the deliberate changes in the budget stance (for example, the budget stance used to be expansionary till the 2010-11 budget, where it changed to become contractionary). Whilst non-discretionary changes characterises the counter-cyclical ability of the budget in order to smoothen out fluctuations. The non-discretionary changes are made up of automatic stabilisers, known as the progressive income tax and transfer payments. These inbuilt stabilisers work by balancing out one another (for example, an economy that is going really bad, will have more transfer payments, as there would be more unemployed. These unemployed people will eventually spend this money from the transfer payments, causing a stimulation in the economic growth, resulting in more jobs being made due to the increase in aggregate demand, and hence more people are employed. If there are more people employed then the income tax will tax more money, and eventually repeat this same cycle). You can refer to the textbook about how fiscal policy achieves the macro objectives as it would be too long for me to type, I only explained the basics or mechanics behind the policy.
Monetary Policy: It is the policy implemented by the Reserve Bank, that is used to change the availability of money in the economy, through changes in interest/cash rates. The monetary policy works via DMO's (Domestic Market Operations), where the Reserve Bank buys or sells government securities to influence the level of funds in the Short Term Money Market. This market is accessed by domestic banks via Exchange Settlement accounts. As the level of funds influence the interest rates of banks, the Reserve Bank can hence influence the level of funds in entire economy. The only objectives the monetary policy addresses is economic growth, inflation and unemployment. Refer to textbook about how these objectives are achieved.
Microeconomics: These are policies implemented by the government, in order to increase aggregate supply, hence increasing economic growth and development. They do this via improving the efficiency and productivity of producers. The impact of microeconomics involves mainly structural change, as the microeconomic policies aim to influence the allocation of resources. These policies mainly target both factor and product markets. They target factor markets through subsidies or training programs, in order to improve the efficiency of labour and resources, as well as improving the 3 types of efficiency (allocative, technical and dynamic). They target product markets through privatisation, corporatisation, implementing the National Competition Policy, and I guess protection such as tariffs and subsidies. These policies aim to impact the level of aggregate supply. Labour markets is a major part of microeconomics, so I recommend that you refer to the textbook about that.