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