Economics IGCSE Edexcel - Macroeconomic Policies

Macroeconomic Policies : the instruments used by the government to control economic variables.

Demand side: these are policies which aim to change aggregate demand.

Fiscal Policy: this involves the use of taxation and governmental expenditure. The tax can be both direct (i.e. on income) and indirect taxes (i.e. on people's spending). Governmental expenditure includes sectors such as health, social security and defence.

An expansionary fiscal policy is where the budget deficit is increased by taxing less and/or by spending more to increase aggregate demand. This can help with economic growth, unemployment and the current account deficit.

A contractionary fiscal policy is where the budget deficit is lowers by taxing more and/or by spending less to decrease aggregate demand. This can help with inflation and can also improve the current account deficit as there is less demand for imports.

Fiscal policies are also used to protect the environment. This is achieved through taxes such as landfill tax and the climate change tax.

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Monetary Policy: this involves the use of interest rates or money supply to change aggregate demand.

A tight monetary policy where there are high interest rates and a slow money supply should decrease aggregate demand. This is because more people are saving money and therefore have less money to spend. This has meant that a tight monetary policy has often been used to deal with inflation. It is also used to help with the current account deficit by decreasing demand for imports. However, a tight monetary policy also causes the exchange rate to rise, meaning exports are more expensive and imports cheaper. This means that it might actually worsen the current account deficit.

A loose monetary policy where there are low interest rates and a fast money supply should increase aggregate demand as people are more inclined to spend rather than to save. Loans are also cheaper. This leads to economic growth, a decrease in unemployment. Because of this, it is normally used to ease an economy out of a recession.

Note: the problem with both these policies is that trade-offs have to be made. For example, if you use an expansionary fiscal policy, though this may decrease unemployment and create growth, it might also cause inflation to rise. 

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Supply side: these are policies which aim to change aggregate supply.

1. Privatisation- the transfer of public sector firms to the private sector. This increase competition and therefore increase efficiency, quality and lowers prices. This can be used to decrease inflation. However, it might also increase unemployment. It can also help with the current account deficit as firms become more competitive internationally.
2. Deregulation- by removing old and unnecessary rules and regulations, firms have less cost. This allows them to spend more money on increasing production. This can decrease inflation, increase employment and increase economic growth.
3. Education and training- investing in education and training increases the quality of the human capital and therefore allows for a more productive workforce which in turn increase profits. This helps with inflation, unemployment, economic growth and the current account deficit.
4. Cost of the workforce- by weakening the trade unions, wages can be kept low meaning profits are greater.

Note: supply side policies are generally aimed more at the long term compared to demand side policies.