Macroeconomics

Table of Contents

Introduction3

Discussion3

Part 13

Situation Analysis3

Role of Fiscal and Monetary Policy in Reforming the Situation4

Fiscal Policy4

Monetary Policy5

Corrective Actions5

President5

Chairman of Fed6

Appropriate Strategy7

Effects of the Strategy implementation8

Opportunity Cost8

Part 29

Situational Analysis9

Consequences on GDP9

Effective Strategy9

Conclusion10

References11

Macroeconomics

Introduction

Macroeconomics is a branch of economics that deals with the behavior of individual, households, and firms in the formation of the decision based on the allocation of the limited resources. From the perspective of the government, there are two important goals of the macroeconomics policy formation:

To keep inflation low.

Improve GDP by the rate of 3% per annum.

Budget and debt are some of the two factors which affect the GDP and the development of economy. Therefore, government needs to be very efficient in sustaining the ratio and promoting the growth. Appropriate strategy and a mix of plans and decision are needed to achieve this objective. In this essay, strategy and roles of different authorities will be highlighted essential for the maintaining the GDP and economy (www.investopedia.com, 2013).

Discussion

Part 1

Situation Analysis

In this situation, it is assumed that the country is facing high unemployment and the interest rates are near to zero. Inflation rate of the country has increased by 2% per year and the GDP growth has declined to even less than 2% per year.

In this instance, Okun's law is observed which states the statistical relationship between a country's unemployment rate and growth rate. It is clear from the Okun's law that the unemployment rate and inflation rate are in direct proportion to each other. Thus, the greater the unemployment the more will be the inflation. Consequently, gross domestic product (GDP) will be affected negatively resulting in the hazardous signals in the economy (www.investopedia.com, 2013).

Figure 1: Source: Economic Journal

The situation is worse and against the goals of the government macroeconomics policy formation. Thus, the government has to look upon the factors which are driving these instances and constitute effective strategies to overcome these problems (Kashyap & Stein, 1994).

Role of Fiscal and Monetary Policy in Reforming the Situation

Fiscal Policy

Fiscal policy is the effective use of government revenue collection and expenditure to influence the economy. Government should constitute the policy and strategy which ensures the effective allocation of the government revenues which they generate in the form of different taxes and interest rates (Aurebach & Kotlikoff, 2008).

Government revenues should be used in constituting the budget. Budget for education and human resource should be increased and applied, so that it could benefit the participants of the society (Aurebach & Kotlikoff, 2008). This will help in the controlling the unemployment ratio and creating a pool of new jobs. Government should also approve and allocate loans for the creative industries and emerging entrepreneurs because it will create employment opportunities in the society.

Monetary Policy

Monetary policy is constituted to promote the economic growth of the country. This is the process by which the authority of the country control and regulate the supply of money within the society. Monetary policy helps in achieving sustainability of the economy. In this case, interest rates are nearly zero; government ...