Macroeconomics Case Study: Japan and US

This document presents a case study analysis of macroeconomic issues in Japan and the United States. It examines Japan's struggle with deflation and the policies implemented by its central bank, contrasting it with the US's experience with government spending and its impact on economic growth. The analysis delves into the complexities of monetary and fiscal policies, highlighting the challenges of choosing the right approach for different economic situations. It also discusses the limitations of macroeconomics, such as the fallacy of composition and the neglect of individual welfare, while emphasizing its importance in understanding and addressing national economic problems like unemployment, inflation, and economic instability. The document concludes by underscoring the role of macroeconomics in policy-making and economic evaluation.

Macroeconomics
[Type the author name]

Macroeconomics 2
Macroeconomics deals with total or big aggregates such as national income, output and
employment, total consumption, aggregate saving and aggregate investment and the general level
of prices First Case study is about Japanese Deflation: Stagnant Japan Rolls Dice on New Era
of Easy Money. Japan is the world third largest economy; one of the challenges faced by Japan’s
central bank governor is stagnant growth in the economy. Japan's new central bank governor
apply policies to rectify falling prices to lift wages and profits in the world's third-largest
economy. Economist suggests governor have to use central-bank policies to boost stagnant
prices. The new central-bank governor has declared a mission to reach the bank's target of 2%
inflation "as soon as humanly possible.
If the yen continues to weaken, inflation picks up, prices rise, then incomes rise—that's all good.
But there will certainly be a time lag'' before the benefits get to consumers, "If only prices rise
but incomes don't, then people have no choice but to cut back on luxury items'' like cab rides.
Stagflation arises in an economy when there is show economy growth or declining GDP with
high inflation in the economy, which means prices are high and there are relatively high
unemployment in the economy. The same situation arises in japan and central bank governor
seeking policies to rectify the situation
A second case study is on Government Spending, Laffer, and Moore: Obama's Real Spending
Record as the case study depict. Under Presidents Bush and Obama, government exploded as a
share of the economy and there is excessive government spending to stimulate the economy.
Firstly, eight years in the president ship of Bill Clinton’s government spending fell. When he
became the president government spending was 23.5% of GDP and when he left in 2001 it was
19.5 % of the GDP. Keynesians, of course, are advising more deficit spending and easy money.

Macroeconomics 3
But as the case study when spending declined sharply the economy boomed under President
Clinton, and when spending soared under Presidents Bush and Obama, the economy tanked.
Maybe Keynes was wrong and Milton Friedman was right when he warned that government
spending is taxation and that government can't tax an economy into prosperity. Friedman made it
clear time and again that restraining government spending stimulates the economy by liberating
private resources.
However, the economies are facing the same problem of declining economic growth but the
solution for both economies is different, in Japan economist suggest expansionary monetary
policies to devaluate the currency as devaluation makes countries export cheaper and import
expensive. A weaker yen also would boost profits for Japan's exporters by making goods cheaper
abroad, eventually triggering higher wages and increased investment. Growing exports also
would push up stock prices, encouraging people to put more of their money in the stock market
instead of bank accounts.
On the other hand, US government need the contractionary fiscal policy to stabilize the
economy, The huge increase in spending as a percentage of GDP under Presidents Bush and
Obama is the reason we are experiencing the slowest recovery since the Great Depression. As
Milton Friedman understood, an economy cannot spend or tax itself into prosperity. Thus, US
government should apply a contractionary fiscal policy to bring the economy back to health. The
right point of focus is not at what pace spending has grown under President Obama but instead
how much more he needs to cut spending from its bloated levels.
The most difficult concepts in this case study are to find to that which economy policy should the
government use to stabilize an economy. government have two option whether they should use a

Macroeconomics 4
monetary policy or a fiscal policy after choosing this , the government has to clarify whether the
policy should be expansionary and contractionary policy.
Although, Macroeconomics deals with total or big aggregates such as national income, output
and employment, total consumption, aggregate saving and aggregate investment and the general
level of prices". But there are some shortcomings in macro economics as macro economies
ignore the welfare of the individual. For instance, if national saving is increased at the cost of
individual welfare, it is not considered a wise policy, The macro economics analysis regards
aggregates as homogeneous but does not look into its internal composition. For instance, if the
wages of the clerks fall and the wages of the teachers rise, the average wage may remain the
same and It is not necessary that all aggregate variables are important. For instance, national
income is the total of individual incomes. If national income in the country goes up, it is not
necessary that the income of all the individuals in the country will also rise. There is a possibility
that the rise in national income may be due to the increase in the incomes of a few rich families
of the country.
Mostly, shortcomings are in attempts to yield macroeconomic generalizations from individual
experiences. In the Macroeconomic analysis the "fallacy of composition" is involved, i.e., an
aggregate economic behavior is the sum total of individual activities. But what is true of
individuals is not necessarily true of the economy as a whole. For instance, savings are a private
virtue, If total savings in the economy increase, they may initiate a depression unless they are
invested. Again, if an individual depositor withdraws his money from the bank there is no
danger. But if all depositors do this simultaneously, there will be a run on the banks and the
banking system will be adversely affected. The main defect in the macro analysis is that it

Macroeconomics 5
regards the aggregates as homogeneous without caring about their internal composition and
structure. The average wage in a country is the sum total of wages in all occupations, i.e., wages
of clerks, typists, teachers, nurses, etc. But the volume of aggregate employment depends on the
relative structure of wages rather than on the average wage. If for instance, wages of nurse's
increase but of typists fall, the average may remain unchanged. But if the employment of nurses
falls a little and of typists rises much, aggregate employment would increase. The aggregate
variables which form the economic system may not be of much significance. For instance, the
national income of a country is the total of all individual incomes. A rise in national income does
not mean that individual incomes have risen. The increase in national income might be the result
of the increase in the incomes of a few rich people in the country. Thus a rise in the national
income of this type has little significance from the point of view of the community. Prof.
Boulding calls these three difficulties as “macroeconomic paradoxes” which are true when
applied to a single individual but which are untrue when applied to the economic system as a
whole. An indiscriminate and uncritical use of macroeconomics in analyzing the problems of the
real world can often be misleading. For instance, if the policy measures needed to achieve and
maintain full employment in the economy are applied to structural unemployment in individual
firms and industries, they become irrelevant. Similarly, measures aimed at controlling general
prices cannot be applied with many advantages for controlling prices of individual products. The
measurement of macroeconomic concepts involves a number of statistical and conceptual
difficulties. These problems relate to the aggregation of microeconomic variables. If individual
units are almost similar, aggregation does not present much difficulty. But if microeconomic
variables relate to dissimilar individual units, their aggregation into one macroeconomic variable
may be wrong and dangerous.

Macroeconomics 6
Macroeconomics enriches our knowledge of the functioning of an economy by studying the
behavior of national income, output, investment, saving and consumption. Moreover, it throws
much light in solving the problems of unemployment, inflation, economic instability and
economic growth.
This course helps us to understand the working of an economy as a whole . The study of
macroeconomic variables is vital for understanding the working of the economy. Our main
economic problems are related to the behavior of total income, output, employment and the
general price level in the economy.
These variables are statistically measurable, thereby facilitating the possibilities of analyzing the
effects on the functioning of the economy. as I mentioned earlier Macroeconomics is extremely
useful from the point of view of economic policy. Modern governments, especially of the
underdeveloped economies, are confronted with innumerable national problems. The study of
macroeconomics is very important for evaluating the overall performance of the economy in
terms of national income. The economics of growth is also a study in macroeconomics. It is on
the basis of macroeconomics that the resources and capabilities of an economy are evaluated. It
is in terms of macroeconomics that monetary problems can be analyzed and understood properly.
Further macroeconomics as an approach to economic problems causes of economic fluctuations
and in providing remedies
Policymakers use these macroeconomics concept in many ways, to evaluate the economic
problem like inflation, unemployment, deflation, stagflation and problem related to external
economy as well like exchange rate determination and improving the balance of payment, policy

Macroeconomics 7
makers can find cause of all the economics problem by macroeconomics and can able to find the
solution for the same.
This course enriches my knowledge that how an economy function, by studying the behavior of
national income, output, investment, saving and consumption. Moreover, it throws much light in
solving the problems of unemployment, inflation, economic instability and economic growth.