The Macroeconomic policy is made up of two main instruments, which are the Fiscal policy and the monetary policy.
The instruments of policy that are used are there to regulate the economy. They are designed in such a way so that they are able to give the government a level of control of the behaviour of the economy. When markets have failed this will give the government reason to intervene. Once the government have decided to intervene, there is still the problem of selecting the correct method of intervention. This is a question of which policy will be the right instrument to fix the problem in the economy.
The fiscal policy is focused on the control of tax and government expenditure. The rates of tax will change according to surplus budget or deficit. A government will have some surplus budget left over when they have spent less money then they have received through taxation and other sources of government income.
"Elementary circular flow analysis suggests that by raising the level of aggregate demand can be raised (by a multiplied amount) with favourable consequences for economy activity and employment". (Griffiths 2000). In theory, cash is injected into the economy. The demand for goods and services will rise. This will have a positive on the business community.
There are two methods of financing: taxation and borrowing. The debt burden assumed by the government is itself an important policy variable and one that has implications for the conduct of monetary policy. Governments may want to smooth out the nation's income in order to minimise the negative effects of the business cycle or they may want to take steps designed to increase the national income.
A reduction in the government spending will have the opposite effect on the economy, which means depressing business, lack...