Macroeconomics

Running head: MACROECONOMICS
Macroeconomics
Name of the Student
Name of the University
Course ID

1MACROECONOMICS
Table of Contents
Proposed policy for Lalaland...........................................................................................................2
Effect of proposed policy changes on macroeconomic variables....................................................3
Tight monetary policy..................................................................................................................3
Expansionary fiscal policy...........................................................................................................4
References........................................................................................................................................6

2MACROECONOMICS
Proposed policy for Lalaland
The policy decision of a nation depends on performance of different macroeconomic
variables. The three important macroeconomic variables affecting policy decision include rate of
economic growth, inflation and unemployment rate (Uribe and Schmitt-Grohe 2017). In
Lalaland, the inflation rate shows that an overtime increasing trend. Inflation rate in Lalaland in
year 1 was 10 percent followed by 15 percent in year 2 and 20 percent in year 3. The
unemployment rate remained steady at 3 percent. Economic growth in contrast shows a
continuous declining trend. For Lalaland, policy therefore should be taken that can reduce
inflation along with stimulating aggregate demand.
In order to curb inflation government should adapt a contractionary or tight monetary
policy. It is the responsibility of monetary authorities of a nation to keep the inflation rate within
targeted range. Central bank here can reduce the money supply though open market operation of
selling government securities (Goodwin et al. 2015). This policy helps to reduce liquidity in the
economy. The ‘liquidity preference theory’ suggests a decline in money supply given money
demand increases interest rate in the money market. Central Bank can also reduce money supply
by increasing cash reserve ratio of banks.
Apart from fighting inflation, focus should also be given to stimulate output growth. The
appropriate policy here to take an expansionary fiscal policy. Fiscal policy expansion can be
done either by increasing government expenditure or by reducing the tax rate. When government
increases spending on goods and services, there is an expansion of aggregate demand resulting in
an expansion of aggregate output. A decline in taxes increases disposable income of people.
People are then able to spend more on goods and services raising aggregate demand of the