Principles and Applications of Macroeconomics ECO 4012

This report discusses the principles and applications of macroeconomics, including macroeconomic policies of government, objectives of macroeconomic policies, economic system, challenges faced by UK economy in achieving macroeconomic objectives and more. The report also provides solutions to the challenges addressed above. The subject is Principles and Applications of Macroeconomics ECO 4012.

Principles and
Applications of
Macroeconomics ECO
4012

Contents
MAIN BODY..................................................................................................................................3
1. Macroeconomic policies of Government.................................................................................3
2. Objectives of Macroeconomic policies...................................................................................5
3. Economic System....................................................................................................................7
4. How UK government uses macroeconomic policy to increase economic welfare..................7
5. Challenges faced by UK economy in achieving the Macro-Economic objectives..................8
Elaborating the solutions of the challenges addressed above......................................................9
CONCLUSION..............................................................................................................................10
REFERNCES:................................................................................................................................11
Books and Journals:...................................................................................................................11

INTRODUCTION
Economics is a study of individuals, governments, businesses and nation to allocate
resources. Economics studies the human behaviour and generally uses the notion that human
have a rational behaviour that will provide optimal benefits to the individual. Economics is
divided into two parts namely, microeconomics and macroeconomics (Barreiro-Gen, 2020).
Microeconomics studies relationship between different values of good and how benefit is
provided to one another. Macro-Economic is a study of economy as a whole. In the following
report consists of structure and functions of economic system and challenges faced in the UK
economy. Economic welfare is a study of how the available goods and resources are used affect
the social welfare.
1. Macroeconomic policies of Government.
Macroeconomic refers to a field in economics which includes the study of problems that
are faced in an economy as a whole. It measures the aggregate demand and supply in an
economy and ascertains the National Income of an economy. The economic problems which are
faced by the country are unemployment, fluctuations in the price goods and services and
consumer price index (Mankiw, 2020). There are mainly three macro-economic policies which
are implemented by the government. These policies help the industries, environment and the
general public of the economy in different ways. Following are the main policies related to the
macro-economic theory which is implemented by the government:
Fiscal Policy
The fiscal policy of the government takes into consideration the expenditure and the
income in the form of taxation of the government. Government of any country make different
expenses to meet the objectives of the business, i.e. to increase the welfare in the economy. This
expenditure of the government is known as public expenditure. This expenditure may include the
expenses on the education, health care, transport and the other benefits provided to the common
people of an economy.
Any organisation, before spending actual funds, prepares their forecasts known as
budgets. Similarly, an economy prepares their budgets for a defined period and it includes all the
government expenditure and its income which the government focuses to go for. The actual
budget of the economy may face surplus or a deficit. The government is required to borrow
funds to pay off its expenditure in the case of deficit. When the revenue of the economy is

greater than its expenses, this creates a case of budget surplus. A balanced budget is when the
government's revenue is equal to its expenditure.
Government takes this policy into consideration when they want to increase the aggregate
demand of the economy and in return, raise the economic growth and employment of the nation.
The government will rise its expenditure and may cut on the income of the government by
reducing the rate of taxes (Maziarz, and Mróz, 2020). This will create availability of more credit
with the general public of the nation and their aggregate demand rises with more investment.
This is known as the reflationary fiscal policy.
The government, in the case they want to reduce aggregate demand due to the inflationary
pressure in the economy, will cut on their expenditure and revise increase the rate of taxes in the
economy. This will encounter less availability of credit with the general public of the economy
and hence, reduce spending and increase in the general price level of the business.
Monetary Policy
The monetary policy of the government deals with the supply of money, the different rates of
interest in the economy. Mainly the economies use rate of interest as the measure of monetary
policy. The circulation of financial funds is the main focus of monetary policy. There are mainly
two types of monetary policy that any government would take up for the economy. These are, a)
Deflationary monetary policy and b) Inflationary monetary policy.
When the government is facing the conditions of deflation in the economy, i.e., the
demand for the goods are increasing and there is high level of investment in the economy, the
government would rise the rate of interest in the economy. This mean that the investments and
the consumption in the economy will lower down due to lack of credit available with the people
in the economy. The firms will invest less. This will bring down the aggregate demand in the
economy and the circulation of money would reduce. In contrast, if the economy is facing
inflation in the market, the government will try to reduce the rate of interests which would
increase the in-hand credit of the consumers (Puu, 2018). The consumers will spend more and
the investments in the market will rise. The change in the supply of money is done by the central
bank of the nations. This is one of the characteristics of the central bank of a nation that it acts as
the source for the government to bring the economic fluctuations in balance and let the economy
move in peace.
Supply-side Policies

These policies of the economy refers to the steps which are taken by the government to increase
the supply in the economy and rise the productivity potential of the economy. The focus is
provided to the quantity and the quality of the resources which helps the government to rise the
efficiency of the markets (Clerici-Arias, 2021). Different steps are taken by the government
which are education, training, cutting of direct taxes and benefits etc. this is done to implement
the work more attractive and balance the living on benefits by the people of the country.
2. Objectives of Macroeconomic policies.
The above-mentioned policies of the macroeconomics have different objectives which are
required to be fulfilled by the government. The government have no scope in ignoring these
objectives as these majorly influence the economy of the country and the standard of living of
the common people. Following mentioned are the objectives which are taken into consideration
while formulating macroeconomic policies:
 Inflation- This refers to the rise in the general price level of the goods and services
offered in an economy. Inflation is considered as one of the crucial elements in the
progress of an economy (Mazzoli, Morini, and Terna, 2019). Every government needs to
give full attention to the inflationary rates that are prevailing in the market. Excess
inflation in an economy implies that the purchasing power of the economy will severely
impact and the people of the country may not attain the required goods and services. The
government uses its monetary and fiscal policy to keep in check the inflationary rates that
are prevailing in the market and keep a balance in the economy.
 Unemployment- Every economy gives a critical attention to the man force in the
economy which does not have any work to do. In other words, it means that the country
has potential to use its resources optimally but are not able to as there is unemployment in
the country. This is mainly caused by the disturbances in the GDP, the fiscal and
monetary policies of the country (Mansoorian, Michelis, and Angyridis, 2022). The
application of macroeconomic theory like the supply-side policies will help in creating
skills in the manpower of the economy and increase the efficiency of production for the
country.
 Sustainable economic growth- This is yet another objective which is required by the
government to take into consideration while applying macroeconomic theory. The proper
distribution of wealth in each of the sector and reduction in the parities related to

different aspects of the individual is taken into consideration (Ma, and Liu, 2022.). The
progressive taxation policy that is implemented to reduce such differences among the
poor and rich.
 Equilibrium in the balance of payment- The BOP refers to the inflows and the
outflows of the domestic currency of the country in and around the world. The
government make different policies to create a balance in the payments and the receipts
of the country while having commerce with the different countries (Dawid, and et.al.,
2019).
 Maximising the standards of living- the standard of living of the citizens of a country
determines how good a country is progressing. The government focuses on increasing the
household income in the economy by using different macroeconomic policies.
 Keep Economic Growth rate: It can be observed that GDP of UK from 2010 till 2020
has recorded many fluctuations. It can be noticed that GDP recorded for 2010 was 2.131
which declined till 1.458 in year 2011. Some improvement might have been made due to
which it reflected some rise in the graph in positive aspects for the year 2012 i.e. 1.47. It
kept the movement in upward direction thus highlighted a increase in Gross domestic
product. The figure recorded for year 2013 was 1.89 which is a good indication for

growth of the country. The growth of country didn't just take a pause here but kept on
rising which reached to 2.991 in year 2014. The reasons for such rise in growth of gross
domestic product could be when the importing of products is less and exporting of
products is recorded to be higher than that of imports (Beenstock, 2021). A country is
said to be at surplus and profit when such situation is recorded. There are some factors
which affect GDP of countries such as maintaining Quality of life, Increase in economic
inequality and poverty and underground economic activities. Later, it was observed that
GDP again began to fall from 2.991 till 2.623 (Blotevogel, and et.al., 2022).
3. Economic System
Economic system refers to a system within which, allocation of resources is done while
focusing on the optimum utilisation of resources. The different countries in the world follow
three distinct economic systems which caters to the needs of different economic systems . There
are mainly three economic systems which are followed worldwide. These are, socialist economic
system, capitalist economic system and mixed economic system. In the socialist economic
system, the regulation which are brought by the government of the country focuses mainly on the
welfare of the economy (Dymski, 2020). The price and the output are ascertained by the
government of the country. In the capitalist economic system, all the decisions related to the
price and output of the business units are decided by the private sector and the free forces of
demand and supply. In the mixed economic system, there is an integration in both, public and
private sector and the decisions related to the price and the output are done by these forces.
Government interferes to determine the welfare of the economy and the price and output is
determined by the free forces of demand and supply.
4. How UK government uses macroeconomic policy to increase economic welfare.
An economy is faced with different issues which are critical for a country and its government.
These issues are inflation and deficit in the budget. Different approaches which are used by a
country which are used to create welfare in an economy (Apinran, Usman, Akadiri, and Onuzo,
2022). The three main policies which are followed by the economy are:
 Monetary Policy: Making use of tools like money supply in the economy.
 Fiscal Policy: Making use of tools like government spending and taxes payments to the
government.

 Exchange Rate policy: This concerns with the exports and imports of different goods and
services into and out of the economy.
These policies are designed by the central bank of the country (Forero-Laverde, 2019). The
contraction and expansionary monetary and fiscal policy are used to bring the welfare in the
economy.
5. Challenges faced by UK economy in achieving the Macro-Economic objectives.
Following are the challenges that have been faced by the UK economy in the last 10 years:
Brexit
 Following the Brexit referendum in June 2016, the UK formally departed the EU on
January 31, 2020, after years of political struggle (Wang, and et.al., 2022). This was
followed by an 11-month transition period to give both sides additional time to reach an
agreement on a new trade treaty. During this time, the United Kingdom remained a
member of the single market and customs union, as well as being bound by EU
regulations.
The EU-UK Trade and Cooperation Agreement was signed on December 24, 2020, and
went into force on December 31, 2020, after months of complicated, often acrimonious
discussions. Prime Minister Boris Johnson referred to the £660 billion ($885 billion) pact as his
Christmas gift to the public, saying it will allow the UK to reclaim control of its laws while
avoiding trade tariffs and quotas.
Investment Monitor looked at the time following the EU vote in the second quarter of 2016
to analyse the UK's economic performance in the aftermath of Brexit. According to OECD data,
the UK's GDP increased by 14.3% from Q2 2016 to Q3 2021. This is a slower pace of growth
than four of the EU's most powerful economies. Germany had the greatest indexed growth rate
of 32.2 percent during the same time, followed by Spain (25.6 percent), France (23%), and Italy
(23%). (16.3 percent ).
Due to the Brexit, the UK economy faced 13-year high Inflation which caused many grievances
in the economy (Labonne, and Weale, 2020). The economy was already facing such disturbed
state in its investments and the emergence of the Covid-19 pandemic worsened the situations.
The GDP of the country was recorded too low for the year 2020-2021.
Covid-19 Pandemic

 The UK economy has endured because of the Covid-19 pandemic. In the second quarter
of 2020, GDP fell by 19%. This is the greatest drop in GDP the UK has at any point
found in a quarter (Akerman, and Gaarder, 2022). The significant reasons for this drop
are the consolidated results of extensive reductions in venture and utilization. In light of
the pestilence, the public authority supported use, yet insufficient to balance the drop in
utilization and venture. Moreover, the United Kingdom's exchange surplus the second
quarter of 2020 had little impact on GDP. The best performing macroeconomic pointer
was joblessness.
After a serious drop in GDP, joblessness rose from 4.0 percent in January 2020 to 5% in
December 2020. With monetary recuperation, there is a risk of critical expansion when repressed
interest is delivered, causing quick financial development and thus a high inflationary gamble
(James, and Quaglia, 2020). In general, the Covid-19 pandemic and the lockdown altogether
affect the United Kingdom, with decreases in utilization and speculation being the essential
offenders. Due to the points of government strategy, GDP has contracted significantly while
joblessness has remained low. The accompanying section of this report will look at the adequacy
of government strategy and strategy execution in helping post-Covid-19 financial recuperation.
Elaborating the solutions of the challenges addressed above
Following are the solutions which the economy of UK can consider while taking corrective
measures for the two of the challenges mentioned above:
 Optimum utilisation of resources: In each country, there is a shortage of assets and its
uses are limitless. It basic implies that financial plan allotted to every nation is nearly
lesser than its prerequisites (Chudik, Hsiao, and Timmermann, 2022). Subsequently, on
the off chance that a country involves its assets in a viable way, it will bring about the
upgraded yield.
 Contractionary monetary policy: When an economy has excessive inflation,
contractionary monetary policy is implemented, which raises interest rates and
diminishes the nation's buying power (Aldred, 2019). This will eventually result in a
reduction in the country's money supply. Even the government can utilise wage and price
restrictions to combat the inflationary situation.

 Currency demonetisation: The government of a given nation can demonetize higher-
value currencies, which helps to lower the amount of black cash in circulation and fight
corruption. It will raise the country's standard of living.
 Correcting disequilibrium: When there is an imbalance in the payment balance.
Monetary and non-monetary measurements are the two main categories of measures.
Deflation, exchange control, and depreciation are all monetary measures. Tariffs, quotas,
and import substitution are examples of non-monetary measures (Trombetta, 2021).
Quotas limit the amount of imports into a country by defining the maximum amount that
may be brought into the country. Import substitution allows a country to make a product
that it would otherwise import from another country. At the period of Covid-19, the
United Kingdom began producing its own products rather than relying on imports. It aids
in the correction of the amount of disequilibrium in the payment balance.
 Investing increment: The UK government has chosen to implement a number of training
programmes in order to boost public trust in the investment industry. The transfer of
family savings to the investment sector aids GDP development and adds to economic
growth.
 Focus on improving aggregate supply and demand: Changes in the fiscal and
monetary systems help to improve the supply and demand balance. Aggregate supply
may be improved by raising the amount of investment in the economy, which can be
accomplished by raising household understanding of the need of investing their money
wisely. Aggregate demand may be increased by increasing public expenditure by
inhabitants of the country (Salvatore, 2019). When the government of the United
Kingdom lowers interest rates and taxes paid in the economy, people begin to spend more
of their money, increasing their purchasing power and, as a result, increasing the
economy's aggregate demand.
CONCLUSION
From the above-mentioned report, it can be concluded that the theory and application of
macroeconomics is crucial for any country. A country is faced by different challenges which are
required to be well taken care of and the macroeconomic policies of the country helps in
maintaining the aggregate demand and aggregate supply of the country. The monetary and the

fiscal policy of the economy helps in correcting the disequilibrium in the economy of UK. These
are formulated by the Bank of England.

REFERNCES:
Books and Journals:
Barreiro-Gen, M., 2020. Evaluating the effects of mobile applications on course assessment: A
quasi-experiment on a macroeconomics course. International Review of Economics
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Mankiw, N.G., 2020. Brief principles of macroeconomics. Cengage Learning.
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Puu, T., 2018. Macroeconomics and the Trade Cycle. In Disequilibrium Economics (pp. 201-
239). Springer, Cham.
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Measure, with Application to Labor Income Taxes. The BE Journal of
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transparency, reproducibility and replication. Journal of Evolutionary Economics, 29(1),
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James, S. and Quaglia, L., 2020. The UK and multi-level financial regulation: From post-crisis
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Chudik, A., Hsiao, C. and Timmermann, A. eds., 2022. Essays in Honor of M. Hashem Pesaran:
Panel Modeling, Micro Applications, and Econometric Methodology. Emerald Group
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Akerman, A. and Gaarder, I., 2022. Chasing an Elusive Target: Measuring Productivity Growth
under Factor-Biased Technical Change. University of Chicago, Becker Friedman
Institute for Economics Working Paper, (2022-37).

Wang, J., and et.al., 2022. Analysis of the mechanism of the impact of internet development on
green economic growth: evidence from 269 prefecture cities in China. Environmental
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Apinran, M.O., Usman, N., Akadiri, S.S. and Onuzo, C.I., 2022. The role of electricity
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Blotevogel, R., Imamoglu, E., Moriyama, K. and Sarr, B., 2022. Income Inequality Measures
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Ma, J.T. and Liu, T.Y., 2022. Does the high‐speed rail network improve economic
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