Global Macroeconomic Policies: Impact of Rapid Growth and Stock Market Booms

This report discusses the impact of rapid growth in emerging and developing markets and stock market booms in advanced economies on macroeconomic policies. It also highlights the policy response and its impact on the economy.

GLOBAL
MACROECONOMIC
POLICIES

Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
I. Impact of rapid growth in the emerging and developing market due to which prices of the
commodities are increasing. Also discuss the policy response in this situation..........................3
II. The stock market booms in an advanced economy. Discuss the policy response in this
situation and its impact................................................................................................................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................9

INTRODUCTION
Macroeconomics refers to a field in the theory of economics which deals in the
performance of the economies. The major focus of macroeconomics is to check the performance
of the country as a whole and look at the economic output it is able to produce in a given time.
The macroeconomics theory uses a different set of policies which are majorly implemented by
the government and the institutions which act on behalf of the government (World Bank, 2020).
These policies are implemented to cater to different issues which may arise in the working of the
countries. These issues are like the inflation, foreign exchange rates, unemployment in the
economy and so on. The following report highlights two situations that have arisen in the
developing and advanced countries. The report discusses the impact on these on the
macroeconomic level of a country and how these are taken care of by the government.
MAIN BODY
I. Impact of rapid growth in the emerging and developing market due to which prices of the
commodities are increasing. Also discuss the policy response in this situation
From one period of time to the next, economic growth is described as an increase in the
production of economic commodities and services. In both real and nominal terms, this is
computed. Gross national product (GNP) has traditionally been used to measure a country's total
economic growth (GNP) (Summers, 2018). Economic growth is defined as a rise in the
economy's total output. Consumers open their wallets and spend more, showing that they are
putting their money toward a greater quality of life or standard of living, while aggregate
advances in overall output are not necessarily connected with higher average marginal
productivity, which leads to a rise in income.
India, for example, is one of the world's fastest-growing economies in emerging and
developing markets, according to Focus Economics' projections for the next five years. India was
badly afflicted by the global pandemic COVID-19 last spring, and was placed under strict
quarantine (Goodwin, and et.al., 2018). In addition, a countrywide immunisation campaign is
now underway. According to trade data, investments and exports are expanding, indicating that
economic growth will pick up in the following year. The entire amount of money spent in a
particular economy on goods and services consumption is referred to as aggregate demand. The
total quantity of product that firms may make and sell, or the country's actual GDP, is referred to

as aggregate supply. The aggregate demand/aggregate supply model demonstrates which factors
have an influence on total supply or total demand for the whole economy, as well as how they
interact at the macroeconomic level, ensuring the economy's proper functioning and market
application. The AD-AS model links aggregate demand (AD) and aggregate supply (AS) to
represent price levels and production (AS). John Maynard Keynes came up with this concept. In
this instance, the developing market grows, raising the odds of inflation. It is generally known
that money is distributed inefficiently in emerging economies, resulting in some members of
society having greater income levels and others functioning at lower income levels (Khan, Teng,
and Khan, 2020). This brings up the topic of inflation, which will be discussed further using the
AD-AS Model curve presented below:
According to the overrepresented graphic, a rise in consumer income has an impact on
the economy's aggregate demand. As can be seen, the growth in aggregate demand has created
an inflationary gap in the economy, which is unacceptable in developing nations owing to
inequitable income distribution.
The progressive depreciation of a currency's purchasing power over time is referred to as
a rise in the general price. It's also obvious that a quantitative approximation of the rate at which
purchasing power is eroding may be seen in the economy (Jin, Peng, and Song, 2019). Inflation

is a key issue in the economy since it leads the economy to confront increasing and higher costs
for its goods in general, as well as a decrease in the strength of one currency in the market.
The government and central bank of the country are the policymakers, ensuring that the
economy runs smoothly and that money moves in the appropriate way, contributing to the
market's overall development (Shida, 2022). To keep track of the overall inflationary gap and
respond appropriately, the government employs fiscal policy to lower the inflationary gap in the
economy. The government employs fiscal policy in response to the economy's fast expansion
and development. To accommodate these quick changes, the government will impose higher
taxes on sectors that contribute to these development possibilities while also reducing their own
spending in the economy, since the country already has a sufficient flow of capital and finances.
This approach emphasises the usage of government revenue and spending. This technique
contributes in the stabilisation of the economy by altering the entire allocation of taxes and
government expenditure (Zhuang, and et.al., 2021). To keep inflation under control, the
government boosts interest rates while also lowering subsidies, resulting in lower total consumer
expenditure. They are able to keep the economy's inflation under control with this strategy.
Contractionary fiscal policy occurs when the government either reduces spending or raises taxes.
Its name originates from the way it causes the economy to contract. It reduces the amount of
money available for companies and people to spend.
The merit of this policy is that it is one of the most straightforward policies to adopt
because it only concerns government expenditure and revenue. It helps the country's economic
growth and development, especially during a downturn. As a result, during the early stages of
development, it is universally accepted. It lowers loan applications and interest rates, allowing
more money to flow into the economy.
II. The stock market booms in an advanced economy. Discuss the policy response in this
situation and its impact.
The advanced economies refer to the countries which are more developed and the
countries which provide high quality of life to the citizens of the country. The economy also
have advanced technological infrastructure in comparison too less industrialised nations. The
International Monetary Fund classifies the countries as advanced and developing nations. The
economy of the country has high level of per capita income, huge exports and the financial sector
of the country is strong (Inoue, 2018). Stock market refers to a marketplace where the different

buyers and sellers of the shares of a publicly listed company comes together to trade these
shares. As any other market, the stock market also goes through different cycles which include
the boom, depression and the stagnation. The boom is a period in the stock market which refers
to a increased growth within a business and the market industry. This period is very crucial for
any economy as it is followed by shrinking in the economy. The government of the country is
required to make use of the macroeconomic policies to save the economy from shrinking too far
that it fall into depression.
The period of boom in the economy can be interpreted as there is a huge level of trust in
the minds of investors and they have enough funds that they are investing in the stock market.
When they invest in the stock market, the production level in the economy rises due to more
availability of funds with the businesses increase and the employment level also rises in the
economy (Kuzucu, and Kuzucu, 2019). It means that there is huge level of supply of monetary
funds in the economy. This supply of monetary funds in the economy puts a pressure on the
currency on the country as it reduces the purchasing power of the currency. This is a major threat
to the economy in the international market and within the economy as well. This causes the
inflationary pressure on the economy.
The above mentioned issue in the economy creates the chances of inflation as there is
more funds in the economy, the prices in the market tend to rise making the general prices of all
commodities rise. To cater these situations in the economy the policy makers of the country
make use of the monetary policy (Fischer, Martin, and Straubhaar, 2021). The monetary policy
in the economy is controlled and regulated by the central bank of the country. In the U K, The
Bank of England is the major policymaker related to the monetary policy.
Monetary policy of a country is a policy which is implemented by the monetary authority
or the central bank of the country in a view to stabilize the flow of monetary funds in an
economy. In the monetary policy, the central bank uses the tool such as interest rates and money
supply in an attempt to reduce the inflation or the flow of money in the economy.
In the case of advanced economy, the case of stock market boom is a bad situation as it
will reduce the purchasing power of the currency in the international market and the country
would not want this to happen as it will affect its position. The monetary policy will be
implemented in this case as the major reason of the boom in the stock market is the extra supply
of monetary funds in the economy.

By the implementation of monetary policy, the government will employ contractionary monetary
policy which would bring down the inflationary gap in the economy (Jin, and Kim, 2019).
Contractionary monetary policy is driven by increases in the various base interest rates
controlled by modern central banks or other means producing growth in the money supply. The
goal is to reduce inflation by limiting the amount of active money circulating in the economy.
The central bank of the country will increase the rate of interests which are put on the different
borrowings of the banks. This will increase the borrowing rate of the different other banks and in
return the borrowers will reduce their borrowings in the economy. This reduction in the
borrowing will cater the investments and the extra supply of monetary funds in the economy.
The inflationary gap will be reduced in the economy (Dinçer, Yüksel, Adalı, and Aydın, 2019).
The above diagram shows how the contractionary monetary policy will reduce the supply of
money in the economy and cater the inflation of the country.
The major merit of the monetary policy is that it reduces the cost of investment for the different
businesses in the economy. The interest rates are lowered and the households and the firms spend
more in the economy. The central bank of the economy can easily adjust the monetary policy
quicker than the government implement the fiscal policy.
CONCLUSION
From the above-mentioned report, it can be concluded that the different policies in the
macroeconomics are implemented in the country as a policy response to the different issues that
may arise in the country. These policies may be expansionary or contractionary depending upon

the nature of the problems. The overall impact of these is to bring stability in the economy.
Fiscal and monetary policy are such policies. The rapid growth in the developing market put
some inflationary pressure on the country for which the government uses fiscal policy. The boom
in the economy makes the purchasing power of the currency lower which makes the general
prices of the economy go higher, to cater this, the central bank of the country uses monetary
policy in the economy. These policies make the overall flow of money to lower down and bring
down the inflation back to normal.

REFERENCES
Books and Journals
Dinçer, H., Yüksel, S., Adalı, Z. and Aydın, R., 2019. Evaluating the role of research and
development and technology investments on economic development of E7 countries.
In Organizational transformation and managing innovation in the fourth industrial
revolution (pp. 245-263). IGI Global.
Fischer, P.A., Martin, R. and Straubhaar, T., 2021. Interdependencies between development and
migration. In International migration, immobility and development (pp. 91-132).
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Goodwin, N., and et.al., 2018. Macroeconomics in context. Routledge.
Inoue, T., 2018. Financial development, remittances, and poverty reduction: Empirical evidence
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Jin, P., Peng, C. and Song, M., 2019. Macroeconomic uncertainty, high-level innovation, and
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simulated ARDL approach. Environmental Science and Pollution Research, 27(31),
pp.39560-39571.
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Shida, J., 2022. The macroeconomic determinants of house prices and rents. Jahrbücher für
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Summers, L.H., 2018. Secular stagnation and macroeconomic policy. IMF Economic
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World Bank, 2020. Global economic prospects, June 2020. The World Bank.
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