Macroeconomics (from the Greek prefix makro- meaning "large" and economics) is a branch of economics dealing with the

performance, structure, behavior, and decision-making of an economy as a whole, rather than individual markets. This includes
national, regional, and global economies .

Macroeconomists study aggregated indicators such as GDP, unemployment rates, and price indexes to understand how the whole
economy functions. Macroeconomists develop models that explain the relationship between such factors as national
income, output, consumption, unemployment, inflation, savings, investment, international trade
Macroeconomics encompasses a variety of concepts and variables, but there are three central topics for macroeconomic.
1.
2.
3.

output,
2.unemployment, 3.
inflation.

1.

National output is the lowest amount of everything a country produces in a given time period. Everything that is produced
and sold generates income. Therefore, output and income are usually considered equivalent and the two terms are often
used interchangeably. Output can be measured as total income, or, it can be viewed from the production side and
measured as the total value of final goods and services or the sum of all value added in the economy.Macroeconomic
output is usually measured by Gross Domestic Product (GDP) or one of the other national accounts. Economists
interested in long-run increases in output study economic growth. Advances in technology, accumulation of machinery and
other capital, and better education and human capital all lead to increased economic output over time. However, output
does not always increase consistently. Business cycles can cause short-term drops in output called recessions.
Economists look for macroeconomic policies that prevent economies from slipping into recessions and that lead to faster
long-term growth.

2.

The amount of unemployment in an economy is measured by the unemployment rate, the percentage of workers without
jobs in the labor force. The labor force only includes workers actively looking for jobs. People who are retired, pursuing
education, or discouraged from seeking work by a lack of job prospects are excluded from the labor force.

Gross domestic product (GDP) is a measure of the size of an economy. It is defined as "an aggregate measure of
production equal to the sum of the gross values added of all resident, institutional units engaged in production (plus any
taxes, and minus any subsidies, on products not included in the value of their outputs)"

3.

Inflation and deflation

A general price increase across the entire economy is called inflation. When prices decrease, there is deflation. Economists
measure these changes in prices with price indexes. Inflation can occur when an economy becomes overheated and grows too
quickly. Similarly, a declining economy can lead to deflation. Central bankers, who control a country's money supply, try to
avoid changes in price level by using monetary policy. Raising interest rates or reducing the supply of money in an economy
will reduce inflation. Inflation can lead to increased uncertainty and other negative consequences. Deflation can lower
economic output. Central bankers try to stabilize prices to protect economies from the negative consequences of price
changes.
Question: What is the difference Between Monetary and Fiscal Policy?

Monetary policy involves changing the interest rate and influencing the money supply.
Fiscal policy involves the government changing tax rates and levels of government spending to influence aggregate
demand in the economy.
They are both used to pursue policies of higher economic growth or controlling inflation.
Monetary Policy
Monetary policy is usually carried out by the Central Bank / Monetary authorities and involves:

Setting base interest rates (e.g. Bank of England in UK and Federal Reserve in US)

Influencing the supply of money. E.g. Policy of quantitative easing to increase the supply of money.
How Monetary Policy Works

The Central Bank may have an inflation target of 2%. If they feel inflation is going to go above the inflation target, due to
economic growth being too quick, then they will increase interest rates.

Higher interest rates increase borrowing costs and reduce consumer spending and investment, leading to lower
aggregate demand and lower inflation.

If the economy went into recession, the Central Bank would cut interest rates. See: Cutting interest rates
Fiscal Policy
Fiscal Policy is carried out by the government and involves changing:

Level of government spending

Levels of taxation

1.

To increase demand and economic growth, the government will cut tax and increase spending (leading to a higher budget
deficit)

2.

To reduce demand and reduce inflation, the government can increase tax rates and cut spending (leading to a smaller
budget deficit)

Which is More Effective Monetary or Fiscal Policy?

In recent decades, monetary policy has become more popular because:

Monetary policy is set by the Central Bank, and therefore reduces political influence (e.g. politicians may cut interest rates
in desire to have a booming economy before a general election)

Fiscal Policy can have more supply side effects on the wider economy. E.g. to reduce inflation higher tax and lower
spending would not be popular and the government may be reluctant to purse this. Also lower spending could lead to reduced public
services and the higher income tax could create disincentives to work.

Monetarists argue expansionary fiscal policy (larger budget deficit) is likely to cause crowding out higher government
spending reduces private sector spending, and higher government borrowing pushes up interest rates. (However, this analysis is
disputed)

Expansionary fiscal policy (e.g. more government spending) may lead to special interest groups pushing for spending
which isnt really helpful and then proves difficult to reduce when recession is over.

Monetary policy is quicker to implement. Interest rates can be set every month. A decision to increase government
spending may take time to decide where to spend the money.
However, the recent recession shows that Monetary Policy too can have many limitations.

Targeting inflation is too narrow. This meant Central banks ignored an unsustainable boom in housing market and bank
lending.

Liquidity Trap. In a recession, cutting interest rates may prove insufficient to boost demand because banks dont want to
lend and consumers are too nervous to spend. Interest rates were cut from 5% to 0.5% in March 2009, but this didnt solve
recession in UK.

Even quantitative easing creating money may be ineffective if banks just want to keep the extra money in their balance
sheets.

Government spending directly creates demand in the economy and can provide a kick-start to get the economy out of
recession. Thus in a deep recession, relying on monetary policy alone, may be insufficient to restore equilibrium in the economy.

In a liquidity trap, expansionary fiscal policy will not cause crowding out because the government is making use of surplus
saving to inject demand into the economy.

In a deep recession, expansionary fiscal policy may be important for confidence if monetary policy has proved to be a
failure.