Undrestand Macroeconomics Policies

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When the macroeconomics equilibrium exist in the overall economy, there is no need for government intervention. If market forces cause a change in equilibrium and this shift causes inflation or unemployment to increase, the government has several tools called stabilization policies.

I. Fiscal policy
Fiscal policy changes are implemented to directly affect consumer spending and saving habits. Government spending or tax policies are used to shift aggregate demand to a new levels. There are 2 types of fiscal policy that the government use to influence the economic activity.
1. Expansionary fiscal policy:
In expansionary fiscal policy, the government increases their spending or cutting taxes, thereby creating additional consumer dollars for spending.
2. Contractionary Fiscal Policy: if the government feels the economy is heating up with inflation, they can reduce spending and increase taxes, inducing a slow down.

II. Monetary policy
1. Change in Bank Rate
The Central Bank lends money at interest which is known as the prime rate. The chartered banks add on a few percentage points to their clients. When the Central Bank changes prime, this signals a change throughout the system. When the bank rate increases, it tightens the monetary policy. A reduction has the opposite effect.
2. Open Market Operation
the central bank influences the money supply daily by buying and selling government treasury bills to other bank, financial institution and individuals If the bank wants to pursue an expansionary monetary policy, it buys treasury bills for money on the open market, which has the effect of increasing the money supply. On the other hand, if the bank wants to pursue a contractionary fiscal policy, it sell treasury bills fot taking away money supply from the market.

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