The Term Macroeconomics

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Macroeconomics is a branch of economics concerned with the organization, efficiency, actions, and general decision-making of any economy. Macroeconomics is concerned with regional, national, and global economies, and it has a broader effect on economic growth (Romer & Romer, 2010). Macroeconomics, on the other hand, is concerned with indicators such as GDP (Gross Domestic Product), unemployment rates, price indexes, national wages, and the interrelationships between sectors of the economy. Macroeconomists have produced a variety of frameworks that they have used to advance hypotheses for different problems. These models have helped macroeconomists deal with matters such as national income, unemployment, international trade, savings, inflation, international finance, output, investments, and consumptions. This paper looks at the two macroeconomic perspectives that are active monetary and fiscal policies and zero inflation targets.

Active Monetary and Fiscal Policies

The monetary and fiscal policies are economic tools used by various states to achieve their macroeconomic objectives. Fiscal policies are geared towards increasing the economies aggregate output (Blanchard, Dell & Mauro, 2010). Monetary policies, on the other hand, are used to control inflation and interest rates. Fiscal policies have direct impacts on goods market while the monetary policies have direct impacts on asset market. The goods and asset markets are usually connected through the two micro-variables. They do interact in a manner that influences the outputs and interest rates within economies. Fiscal and monetary policies can either be active or passive. An active fiscal policy involves the independent determination of spending levels and tax of inter-temporal budget considerations. Active monetary policy, on the other hand, pursues inflations that are independent of the fiscal policies.

Situations might arise where we have an active fiscal policy. When such a scenario arises, the economy is faced with a fiscal shock that is expansionary that will raise prices (Romer & Romer, 2010). Money growth then increases passively since the responsible monetary authorities are forced to accommodate the shocks. Monetary policies are capable of containing expansionary pressures that are created by the fiscal policies in the event that the responsible authorities are all active. When there are negative supply shocks, the authorities involved use conflicting policies. Fiscal authorities do follow expansionary policies in a bid to bring back the outputs to their originals states. Monetary authorities, on the other hand, employ contractionary policies so as to reduce inflation rates.

In situations of demand shocks with no corresponded output changes, deflation or inflation might occur. Such scenarios ensure that the monetary and fiscal authorities work harmoniously by employing expansionary policies when there is a negative demand shock (Blanchard, Dell & Mauro, 2010). They employ the usage of contractionary policies in situations of positive demands so as to reduce aggregate demand thus bringing inflation under check. When the economy is faced with positive fiscal shocks, aggregate outputs do increase beyond potential levels as fiscal policies lead to a rise in aggregate demands. Investments reduce and the output is depressed further. Monetary authorities respond in countercyclical manner in a bid to tighten monetary policies in the short run and adopting quantitative policies in the long run. In cases of negative shocks, changes in banking policy rates occur. Fiscal authorities do respond through expansionary policies but later on reverses them. I, therefore, support an active fiscal and monetary policy since they will work hand in hand in addressing various economic issues.

Zero Inflation Rate

Having a zero inflation rate could both be advantageous and disadvantageous to the economy. In the short run, having a lower inflation rate would be advantageous to the ordinary person (Blanchard & Gali, 2007). This is because most of them would benefit from cheaper prices making them have more disposable income. This may trigger people to save more thus increased investment. Spending might also go up thus ensuring that there are some levels of growth. This could pose a danger to the economy if the low levels of inflation persist for longer periods. The economy could be faced with the problem of deflation that will eventually lower the economic growth in the long run.

Further analysis suggests that inflation rates do fall due to short-term factors such as a fall in oil and petrol prices (Romer & Romer, 2010). The short-term factors might be reversed at some point making it a challenge to deal with low inflation rates. When commodity prices fall, real incomes will eventual increase. There has always been the fear that deflation could depress the consumer spending even though the real incomes increase. When prices fall, consumers do have their discretionary incomes or spending powers increased. Such scenarios ensure that the actual spending power of the consumers increases in the short run. Inflation could fall during economic recoveries but still, the economy cannot slip into recession.

In cases where there is higher inflation rate than the normal wage growth, a fall in inflation would be advantageous to consumers. Whenever the nominal wage growth remains low, a fall in the inflation rate would ensure that consumers are better off (Blanchard & gali, 2007). This state will encourage the consumers to spend more than they used to do when the rates were higher. When it comes to long-term expectations, economists argue that a fall in the inflation rate is only due to short-term factors. Either, they argue that lower rates of inflation would lead to permanent low inflations which will eventually result in zero wage growth. They further argue that such scenarios will lead to persistent deflation that is not good for economies. When it comes to government finances, lower rates of inflation would be advantageous in the sense that they would spend less. This advantage will only be there on the part of the government in the short run and not in the long run. The government will experience benefits that are index linked which goes further in helping it spend less and improves its various deficits.

To conclude, therefore, lower inflation rates will only be advantageous in the short run but pose serious challenges in the long run. Before lowering inflation rates, various factors that lead to lowering of inflation rates needs to be looked at carefully. Either, a low inflation rate does not necessary mean that the consumers are well of. It helps the government, though, in having excesses that it can use in financing various budget deficits that it might have. Therefore, a low inflation rate can possibly cause problems in the long run when not carefully thought out and thus I support and relatively higher inflation rate.

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Blanchard, O., Dell’Ariccia, G., & Mauro, P. (2010). Rethinking Macroeconomic Policy. Journal Of Money, Credit And Banking, 42(S1), 199-215.

Romer, C. D., & Romer, D. H. (2010). The Macroeconomic Effects Of Tax Changes: Estimates Based On A New Measure Of Fiscal Shocks. The American Economic Review, 100(3), 763-801.

Blanchard, O. J., & Gali, J. (2007). The Macroeconomic Effects Of Oil Shocks: Why Are The 2000s So Different From The 1970s? (No. W13368). National Bureau Of Economic Research.

August 19, 2021

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