Principles and Applications of Macroeconomics

Module Code: ECO 4012
Module Title: Principles and Applications of
Macroeconomics
Topic: Evaluate the success of Government macroeconomic
Policies to achieve both lower levels of Unemployment and
lower rates of Inflation over the last 10 years.
Student Name:
Student ID:
1

Table of Contents
Introduction......................................................................................................................................3
Macroeconomic policies to reduce the unemployment rate and inflation.......................................3
Reducing unemployment rate..........................................................................................................4
Monetary policy...........................................................................................................................4
Fiscal policy.................................................................................................................................5
Depreciation of exchange rates (Exchange rate policy)..............................................................7
Decreasing the inflation rate............................................................................................................9
Monetary Policy...........................................................................................................................9
Fiscal policy...............................................................................................................................10
High exchange rate....................................................................................................................11
Advantages and disadvantages of the policies...............................................................................11
Monetary....................................................................................................................................11
Fiscal policy...............................................................................................................................12
Exchange rate policy..................................................................................................................12
Key challenges and suggestions....................................................................................................13
Hindering the growth.................................................................................................................13
Recession and depression..........................................................................................................13
Conclusion.....................................................................................................................................13
References......................................................................................................................................15
2

Introduction
Macroeconomic policies are used by governments to create a stable economic environment for
long-lasting growth in the economy. Macroeconomics enables a country to understand its entire
economic function and national income (Agénor and Montiel, 2015). Macroeconomics assists to
achieve targeted GDP and economic growth. Macroeconomic policies are important to have a
stable price level in a country’s economy. If a country falls into an economic crisis like poverty,
unemployment, inflation, etc. macroeconomic policies are usually used to find appropriate
solutions to those problems and get out of them as soon as possible. Without macroeconomic
policies, a country cannot stay stable for a long time.
The unemployment rate shows how the economic health of a country is going by. When a
countries GDP increases, the unemployment rate decreases. THE highest GDP means the income
rate is also high as well as higher industrial production. Governments use macroeconomic policy
like fiscal policy or monetary policy to achieve this success. When using expansionary fiscal
policy changes have to be made in spending and taxes to shift the aggregate demand to a more
outward position. In the case of contractionary fiscal policy, the changes in spending and taxes
are made to shift the aggregate demand inward. If the unemployment rate is going lower than
average that means the economy is growing substantially. This might cause inflation if not
controlled. If the unemployment rate is at a higher point than average then it means income and
stocks are going down (Blanchard et al., 2010).
This report explains what macroeconomic policies are and why they are important for the
economy of any country. The purpose of this report is to give a brief explanation of what
macroeconomic policies to adapt to get make the unemployment rate lower and reduce the
inflation rate. The advantages and disadvantages of those policies are discussed as well as
identifying key challenges of applying those policies in an economic system.
Macroeconomic policies to reduce the unemployment rate and
inflation
There are more than few policies to adapt when it comes to reducing unemployment. But for this
report, 3 policies from the demand side are taken. Those policies are monetary policy, fiscal
3

policy, and depreciation of the exchange rate. These policies can also be used to reduce inflation.
And these policies are going to be described in the context of the United Kingdom’s economic
structure and system.
Reducing unemployment rate
Figure 1: Macroeconomic policies to decrease the unemployment rate
Source: (Bernanke, 2020)
Monetary policy
In monetary policy, governments would have to cut down the interest rate. By doing so it enables
people to borrow money from the government and spend and invest more. As a result, aggregate
demand increases, and GDP increases. The United Kingdom has a committee for maintaining its
monetary policy. This committee is called the ‘Monetary Policy Committee’. This committee
consists of 9 members. They hold meetings among themselves and decide what steps to take and
what went wrong in terms of the economy. Currently, MPC has set the standard interest rate for
banks in the UK to 0.1%. By keeping this low interest rate, the UK can keep the exchange rate
4