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Macro economic policies

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Explain why macro policy is more difficult than the models suggest?

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Macro economic policies are examined in the solution.

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Macro economic policies refer to the policies of government & central banks usually intended to maximize growth while keeping down inflation and unemployment. The main instruments of macroeconomic policy are changes in the rate of interest and money supply, known as monetary policy, and changes in taxation and public spending known as fiscal policy. The fact that unemployment and inflation often rise sharply, and that growth often slows or GDP falls, may be evidence of poorly executed macro¬economic policy. However, business cycles may simply be an unavoidable fact of economic life that macroeconomic policy, however well conducted, can never be sure of conquering.

The trend in mainstream economic thought about macroeconomic policy has been
towards minimalism. In the optimistic Keynesian phase of the 1960's, it was assumed that both fiscal and monetary policy were effective tools for macroeconomic management. But the influence of monetarist and New Classical critiques has led to a gradual erosion of theoretical support for activist government policy. First fiscal policy fell by the wayside, perceived as too slow and possibly counterproductive in its impacts. Then New Classical and rational ...

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