Understanding Macroeconomic Goals and Policies

Jan 23, 2025

Achieving Macroeconomic Goals - Introduction to Business

Key Concepts

  • Macroeconomic Goals: Growth, employment, and price stability.
  • Monetary Policy: Controlled by the government to manage the money supply and interest rates.
  • Fiscal Policy: Government’s program of taxation and spending to influence the economy.

Monetary Policy

  • Definition: Government programs to control money supply and interest rates.
  • The Federal Reserve System (Fed): Central bank of the U.S., controls money supply.
  • Interest Rates: Adjusted by the Fed, influencing economic activity.
  • Economic Impact:
    • Contractionary Policy: Tightens money supply, raises interest rates, slows growth, increases unemployment, reduces inflation.
    • Expansionary Policy: Increases money supply, lowers interest rates, boosts spending, stimulates the economy, reduces unemployment, but can increase inflation.

Historical Context

  • **2007-2009 Recession: Fed dropped federal funds rate to 0%.
  • 2015 Rate Increase: Raised to 0.25%.
  • 2017 Further Increase: Range of 0.75%-1%.

Fiscal Policy

  • Definition: Government’s taxation and spending decisions.
  • Stimulating the Economy:
    • Cutting taxes or increasing spending boosts economic activity.
  • Tax Policies:
    • High corporate taxes can hinder competitiveness.
    • U.S. tax rates are lower per capita and as a percentage of GDP compared to similar countries.

Government Revenue and Spending

  • Major Revenue Source: Taxes.
  • Federal Budget Process:
    • President proposes, Congress debates and modifies.

Impact of Fiscal Policy

  • Crowding Out: Government spending can reduce private sector spending in areas like libraries, education, and transportation.
  • Budget Deficits and National Debt:
    • Deficit occurs when spending exceeds revenue.
    • U.S. government borrows through Treasury securities.
    • National debt is the cumulative total of deficits.

Issues with National Debt

  • Crowding Out Private Investment: High government borrowing can increase interest rates, making it costlier for private investment.
  • Debt Distribution: Potential for unequal burden depending on bondholders.

Concept Check

  1. Types of Monetary Policy: Contractionary and expansionary.
  2. Fiscal Policy Tools: Taxation and government spending.
  3. Problems with Large National Debt: Crowding out private investment, unfair burden distribution.

For further exploration, reference the book "Introduction to Business" by Lawrence J. Gitman et al., published by OpenStax in Houston, Texas.