Macroeconomics
Macroeconomics is the study of how individuals may change their behavior when market-wide policies are implemented. In contrast to microeconomics, where individual behaviors are seen as variables and market forces held constant, macroeconomics views individual behaviors as constant while changing the variables of the marketplace. With that said, let us take a look at some applications of macroeconomics.
Fiscal Policy
Fiscal policy is the policy employed by governments to affect an economy. Examples of fiscal policy include the tax structures governments use and the amount of government spending governments employ to improve their domestic economy. While these ideas may sound simple enough, real-life effects of such policies may have many different results.
Governments may either employ expansionary or contractionary fiscal policies as a means of affecting markets and individuals. Expansionary fiscal policy typically suggests relatively lower tax structures and higher government spending. The effects of expansionary fiscal policy are increased consumer demand, greater amount of monetary base in the market, higher interest rates, and higher government deficits.
In effect, expansionary fiscal policy is used to increase consumer demand, therefore increasing market activity. Contractionary fiscal policy, as the name suggests, results in the opposite effects of expansionary fiscal policy through increasing tax structures relative to government spending.
Monetary Policy
Monetary policy is used by governments to affect an economy through the actions of central banks. While some countries (such as the United States) have a central bank independent of its government (the Federal Reserve), other countries may have central banks which act in accordance to their governments. Either way, central banks are the employers of monetary policy.
Monetary policy, in contrast to fiscal policy, employs the manipulation of monetary supply and interest rates to affect the “supply side” of markets. An example of this is the amount of interest businesses and investors hold in the interest rate set by the Federal Reserve. Just like fiscal policy, monetary policy includes both expansionary and contractionary policies. Expansionary monetary policy consists of both increasing the money supply in markets and lowering interest rates. In essence, expansionary monetary policy makes money “cheaper” by devaluing it, driving market activities.
Contractionary monetary policy, on the other hand, is the act of increasing interest rates and reducing the money supply in markets. As the name suggests, contractionary monetary policy reduces market activities. Typically, governments use contractionary monetary policy in order to slow down market activity, and use expansionary monetary policy during market failures.