Macroeconomic management has traditionally seen as a counter cyclical tool used by governments to reduce the natural fluctuation in the business cycle. In the midst of the current global economic crisis, the role and importance of macroeconomic tools have played a crucial role in stabilising delicate business cycles worldwide. In the Australian economy the fiscal policy has had a major impact with the introduction to the two different stimulus packages and high spending 08/09 budget while the monetary policy has loosened from 7.25 to 3.25.
Macroeconomic PolicyMacroeconomic policy is a policy aimed at stabilising the aggregate level of economic activity or input. There are two main tools of macroeconomic management; they are fiscal and monetary policy. Fiscal policy refers to the government's use of the federal budget to change the level of economic activity, supple of income and resources distribution in the economy. These objectives can be gained through the manipulation of the two budgetary instruments of taxation (leakage in the five sector model) and government spending (injection in the five sector model).
Monetary policy is the government's ability (RBA) to affect the level of interest rates in the economy. Changes in the interest rate will automatically affect the growth and cost of credit, therefore influencing spending, output, prices and employment in the economy. This policy is generally used for counter cyclical stabilisation in the economy.
These two policies are used in the short term, in order to smooth out fluctuations in the business cycle.
The Graph on the right shows us what macroeconomic policies do to the business cycle. The green line demonstrates what will happen to the economy if the policies are not implemented and the red line illustrates what will happen when the policies are put into action. The bigger the boom the bigger the trough so...