Macroeconomic goals and policies

Macroeconomic goals aim for sustainable economic growth, price stability, full
employment, and a healthy balance of payments, achieved through instruments like
fiscal and monetary policies.
Here's a more detailed breakdown:
Macroeconomic Goals:

Economic Growth:

A sustained increase in a country's production capacity and living standards,

often measured by Gross Domestic Product (GDP) growth.

Price Stability:

Maintaining a stable price level, typically characterized by low and stable inflation,
preventing rapid increases in the general price level of goods and services.

Full Employment:
A situation where the majority of the available workforce is employed, with
minimal involuntary unemployment.

Balance of Payments Equilibrium:

Ensuring that a country's international payments and receipts are in balance,
avoiding large surpluses or deficits in its trade and financial transaction

Macroeconomic policy

The set of government rules and regulations to control or stimulate the aggregate
indicators of an economy frames the macroeconomic policy. Aggregate indicators
involve national income, money supply, inflation, unemployment rate, growth rate,
interest rate and many more. In short, policies framed to meet the macro goals.

Two main regulatory macroeconomic policies are fiscal policy and monetary
policy.

Fiscal Policy
Fiscal policy is the macroeconomic policy where the government makes changes in
government spending or tax to stimulate growth. Government's use of taxation and
spending to influence the economy. This can involve increasing government
spending to stimulate demand during a recession or raising taxes to cool down an
overheating economy Depending on the state of the economy, fiscal policy may
reach for different objectives: its focus can be to restrict economic growth by
mediating inflation or, in turn, increase economic growth by decreasing taxes,
encouraging spending on different projects that act as stimuli to economic growth
and enabling borrowing and spending. The stances of fiscal policy are the
following:

Expansionary fiscal policy is used by the government when trying to balance

the contraction phase in the business cycle. It involves government spending
exceeding tax revenue by more than it has tended to, and is usually undertaken
during recessions. Examples of expansionary fiscal policy measures include
increased government spending on public works (e.g., building schools) and
providing the residents of the economy with tax cuts to increase their purchasing
power (in order to fix a decrease in the demand).

Contractionary fiscal policy, on the other hand, is a measure to increase tax

rates and decrease government spending. It occurs when government deficit
spending is lower than usual. This has the potential to slow economic growth if
inflation, which was caused by a significant increase in aggregate demand and the
supply of money, is excessive. By reducing the economy's amount of aggregate
income, the available amount for consumers to spend is also reduced. So,
contractionary fiscal policy measures are employed when unsustainable growth
takes place, leading to inflation, high prices of investment, recession and
unemployment above the "healthy" level of 3%–4%.

Monetary Policy:

Monetary policy deals with changes in money supply or changes with the
parameters that affects the supply of money in the economy. Actions taken by a
central bank to manage the money supply and interest rates. This can involve
lowering interest rates to encourage borrowing and spending during a downturn or
raising rates to combat inflation

Tools of Monetary Policy

The Federal Reserve commonly uses three strategies for monetary policy
including reserve requirements, the discount rate, and open market operations.

Open Market Operations

In open market operations (OMO), the Federal Reserve Bank buys bonds from
investors or sells additional bonds to investors to change the number of outstanding
government securities and money available to the economy as a whole.

The objective of OMOs is to adjust the level of reserve balances to manipulate the
short-term interest rates and that affect other interest rates. Through open market
operations, a central bank may influence the level of interest rates, the exchange
rate and/or the money supply in an economy. Open market operations can
influence interest rates by expanding or contracting the monetary base, which
consists of currency in circulation and banks' reserves on deposit at the central
bank.

Interest Rates

The central bank may change the interest rates or the required collateral that it
demands. In the U.S., this rate is known as the discount rate. Banks will loan more
or less freely depending on this interest rate. Higher interest rates reduce inflation
by reducing aggregate consumption of goods and services by several causal
paths.[24] Higher borrowing costs can cause a cash shortage for companies, which
then reduce direct spending on goods and services to reduce costs. They also tend
to reduce spending on labor, which in turn reduces household income and then
household spending on goods and services. Interest rate changes also affect asset
prices like stock prices and house prices. Though unless they are selling or taking
out new loans their cash flow is unaffected, asset owners feel less wealthy (the
wealth effect) and reduce spending.
Reserve Requirements

Authorities can manipulate the reserve requirements, the funds that banks must
retain as a proportion of the deposits made by their customers to ensure that they
can meet their liabilities.

Lowering this reserve requirement releases more capital for the banks to offer
loans or buy other assets. Increasing the requirement curtails bank lending and
slows growth.

bank reserves have formed only a small fraction of deposits, a system called
fractional-reserve banking. Banks would hold only a small percentage of their
assets in the form of cash reserves as insurance against bank runs. Over time this
process has been regulated and insured by central banks. Such legal reserve
requirements were introduced in the 19th century as an attempt to reduce the risk
of banks overextending themselves and suffering from bank runs, as this could lead
to knock-on effects on other overextended banks.

Types of Monetary Policy

Monetary policies are seen as either expansionary or contractionary depending on

the level of growth or stagnation within the economy.

Contractionary Monetary Policy:

A contractionary policy increases interest rates and limits the outstanding money
supply to slow growth and decrease inflation, where the prices of goods and
services in an economy rise and reduce the purchasing power of money.

Used to combat inflation and cool down an overheating economy.

Involves raising interest rates, which makes borrowing more expensive and
discourages spending and investment.

Can also involve reducing the money supply through measures like open market
operations (selling government bonds)

Expansionary Monetary Policy:

During times of slowdown or a recession, an expansionary policy grows economic
activity. By lowering interest rates, saving becomes less attractive, and consumer
spending and borrowing increase

Used during economic slowdowns or recessions to boost economic activity.

Involves lowering interest rates, which makes borrowing cheaper and
encourages spending and investment.

Can also involve increasing the money supply through measures like open
market operations (buying government bonds).

Monetary Policy vs. Fiscal Policy

Monetary policy is enacted by a central bank to sustain a level economy and keep
unemployment low, protect the value of the currency, and maintain economic
growth. By manipulating interest rates or reserve requirements, or through open
market operations, a central bank affects borrowing, spending, and savings rates.

Fiscal policy is an additional tool used by governments and not central banks.
While the Federal Reserve can influence the supply of money in the economy and
impact market sentiment, The U.S. Treasury Department can create new money
and implement new tax policies. It sends money, directly or indirectly, into the
economy to increase spending and spur growth.