Principles and Applications of Macroeconomics: Policy Analysis

This essay delves into the principles and applications of macroeconomics, focusing on the UK government's policy objectives of sustainable growth and unemployment reduction. It examines fiscal and monetary policies, analyzing how these tools are employed to achieve economic stability and growth. The essay also explores key economic theories, including the sustainability theory and Keynes's theory of unemployment, to provide a comprehensive understanding of the macroeconomic environment. It discusses the role of the Bank of England and the impact of factors like inflation on the UK's economic performance, highlighting the challenges and strategies involved in maintaining a balanced and thriving economy. Desklib provides students access to a variety of resources, including past papers and solved assignments, to further aid in their understanding of macroeconomic principles.

Principles and Applications of
Macroeconomics

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
Explanation and Analysis of Government Policy Objectives and Policies:................................3
Explanation and Analysis of Theories:........................................................................................6
Application of Policies and Theories:........................................................................................10
CONCLUSION..............................................................................................................................10
REFERENCES................................................................................................................................1

INTRODUCTION
Macroeconomics as the term suggests, involves concepts and understanding of the
economy at the macro level i.e., of an economy. It deals with the concepts and aspects relating to
performance, conduct and structure of the economy as a whole. It will involve and allow
sustainability, economic growth, reduction of unemployment rate and providing strong and
sturdy financial environment of the economy. The vital policies in the macroeconomic
environment of an economy will include monetary policies, fiscal policies and rate exchange
policies. The monetary policy will involve policies regarding stabilization of the levels of prices
and prevent more than usual variances in the inflation whereas, fiscal policy will involve policies
regarding the regulation of the expenditures of an economy or a nation and also includes
supervision of tax rates. All such policies under fiscal policy will be supervised and manipulated
by the central bank of the nation. Such fiscal and monetary policy will involve and allow the
economic development and consistency of a nation’s economy by having focus on the key
concepts of the policies of the government in macroeconomic environment like stability of the
prices, full employment, financial growth at a sustainable level and maintenance of the
equilibrium of the expenditures of the government.
The following essay will be containing and explaining the concepts of fiscal policy and
monetary policy of the government of the UK and in what manner the government will be able to
achieve the objectives of sustainable growth and reduction in the unemployment rate by
implementing these fiscal and monetary policies and other factors that will influence the chances
of success in such a macroeconomic environment. Also, theories namely sustainability theory
and Keynes’s theory of unemployment are discussed which can be applied and tested and their
effects can be explained in this macroeconomic environment.
MAIN BODY
Explanation and Analysis of Government Policy Objectives and Policies:
The key government policy objectives to be achieved through the implementation of the
fiscal and monetary policies are sustainable growth and reduction in the unemployment rate
which are explained as follows:
Sustainable Growth –
High growth and development are the primary targets for any economy but this growth
shall be achieved with the objectives of sustainable growth and development to be kept in mind.

UK government’s plan of action towards the sustainable growth involves attainment of the four
objectives i.e., fortification of environment, social equality and progress, preserving natural
resources and constant development financially. The policies and strategy of the government
towards the sustainable growth empowers the individuals with the right to healthy, safe and clean
environment (Regan and et.al., 2021). Such a sustainability can be achieved through reduction in
the poverty, unemployment, pollution and poor accommodation across the economy of the nation
and to deal with these social, environmental and economic barriers of the economy, the
government has devised two detailed agreements. And thus it can be said that such sustainable
growth will get impacted from the factors like development in the social aspect, meeting the
requirements of everyone, protecting the atmosphere successfully and effective and wise
consumption of the elements of the nature (Borland, Bhatti and Lindgreen, 2019). Global
agreement named 2030 Agenda for Sustainable Development is done to address the alarming
issues like extreme poverty, preventing the practices of inequality and injustice and leaving no
one behind.
Some of the goals of the UK government in delivering the SDGs (Sustainable
Development Goals) includes ending of poverty everywhere and in all forms, ending of hunger
and achievement of food security and improvements in the nutrition, ensuring the well-being of
all individuals of all ages along with the healthy lives, ensuring the good quality of education and
promotion of opportunities for learning to the individuals, attainment of the equality among the
genders and empowerment of all girls and women, ensuring water and sanitation to be available
and be managed for all, etc.
Reducing Unemployment Rate –
The growth and development of the nation and its economy depends upon its population
and more importantly, its working population. The part of the population which is able and
capable shall be working up to its full potential and calibre to be able to work towards the growth
and development of themselves as well as for the economy in which they are residing and
functioning. Such a motive can be addressed by the objective of the government of the UK of
reduction of the rate of unemployment (Langella and Manning, 2022). The government has
forecasted the rate of unemployment to be 4% in the year 2023. It is to be noted that the
unemployment directly affects the people of the economy as it affects their earnings and
therefore, it is the economic goals of the people that matters most to them i.e., having a good

source of income and is how the people survive and maintain their standard of living. The benefit
of the reduction in the rate of unemployment is that the gross domestic product will go up as
more people will be working and will result in more output of the national produce. Now
referring to the various types of unemployment like frictional, seasonal, structural and cyclical,
the various types of policies needs to be devised, implemented and monitored for their efficiency
and effectiveness like expansionary demand – side policies, employing training schemes to the
people for their respective jobs to improve their skills, etc.
Now, the policies devised by the government of United Kingdom to address and achieve
the above objectives of sustainable growth and reduction in the rate of unemployment can be
discussed as follows:
Fiscal Policy –
Fiscal policies simply mean policies devised relating to the level of taxation and the
expenditures of the government so as to influence the economic growth rate of the nation and the
economy. The main organisation involved in such policies is Bank of England (Backus and
Driffill, 2021). In such a policy, activities like adjusting the interest rates of the banks, reserve
requirements of the banks, affecting the flow of government securities and foreign exchange by
purchasing and selling such securities and foreign exchange, degree of borrowings in the market,
forms of borrowing in the market, etc. (UK Fiscal Policy, 2022). Here, gross domestic product
(GDP) measure the output of an economy which is represented by the following equation:
GDP = C + I + G + NX.
GDP denotes the value of goods and services produced totally, C denotes private
consumption, I denote private investment, G denotes purchases by the government of the goods
and services and NX denotes net exports which is the difference between exports and imports of
the economy (Özmen and et.al., 2022).
Now, the fiscal policies can be operated through two means namely automatic
stabilization and discretionary policy (Bell and Blanchflower, 2018). These fiscal policies are
constrained through the Fiscal rules which requires updating. UK currently has four fiscal rules
i.e., four targets to be achieved which are as follows:
 Fall in the debt as a part of the national income in the three years’ tenure.
 The budget shall be in surplus in the third year i.e., revenues shall be exceeding the spending.
 Net investment on the public sector shall be below 3% of GDP.

 Some constraints additionally applied on the social spending.
Monetary Policy –
Monetary policies are the policies and strategies adopted by the central bank or the
government of a country to control the flow of the money in the economy and the costs to be
incurred to borrow such money (Gao and Que, 2022). Bank of England is the central bank of the
UK and used two tools of monetary policy i.e., setting of bank rate which is the interest rate
charged from the banks to borrow money from this central bank and purchasing of bonds with an
aim to reduce the interest rates on savings account and loans through the process of QE
(quantitative easing). Monetary policy keeps in check the rate of inflation and therefore, keep
such rate of inflation at 2% as targeted by the government. The primary aim of the central bank
is to keep the rate of inflation as low as possible for the betterment of economy of the UK
(Monetary policy, 2022). According to the Bank of England, current inflation rate is 9.1% and
current bank rate is 1.25%. the Monetary Policy Committee (MPC) of the central bank duly
decides the action related to the monetary policy to be taken and such policies are announced
eight times annually.
Such low rate of inflation corresponds to the aim of the government to achieve the low
price objectives and stable the costs in the economy (Lee and Werner, 2018). Keeping in mind
such objectives of the government, policies related to the employment and sustainable growth of
the government plays a very important role. Seeing the current inflation rate of 9.1%, the UK
government needs to improve the monetary policies across the economy as such a high inflation
also affects the global trade operations of the country.
Explanation and Analysis of Theories:
To address the objectives of the economy of sustainable growth and reduction of
unemployment rate and utilizing the provisions of the fiscal policy and monetary policy along
with the various theories which can be explained as follows:
Sustainability Theory –
Sustainable growth refers to the growth and development of a nation or an economy
without compromising the environment around such economy or nation. Such sustainable growth
will involve various communal institutions working and practicing collectively with an emphasis
on the sustainability of the environment in and around which they are functioning. Such a theory
says that the nation and economy shall grow and develop without impacting and threatening their

impact on the globe. It can also be defined as maintaining per capita income flow over long term
with minimal impact on the environment in and around thus to devise policies and procedures to
maintain such per capital income flow (Haldane, 2018). Being in the era where environment is at
the risk of degradation and damage beyond repair, the country or an economy when looking at its
economic development shall also consider the policies and strategies related to the sustainable
growth of the nation or the economy. In the UK, such a theory of sustainability means
diminishing the threats on the environment which is caused due to society and individuals and
achieving the socio economic growth of the economy or the country. This theory will allow the
economy and society to be long lasting and can be maintained globally (Borisova, 2021).
Sustainability theory shows important economic, political and social issues which needs to be
addressed. It can also be said that just short term goals of profit maximization and individual
consumer satisfaction will lead to degradation and depletion of the natural as well as social
resources and such resources are the one on which the well-being and survival of the species
depends.
Keynes’s Theory of Unemployment –
Due to the worldwide depression of the 1930s, Keynes argued that a full employment
situation can never be achieved in the case of a capitalist economy. Therefore, he devised his
hypothesis theory called under – employment equilibrium hypothesis instead of following the
full employment equilibrium which he argued to be never achievable. He explained that if at the
current levels of wage rates, if a person is unable to find employment, this creates a situation of
unemployment and he termed it as involuntary unemployment.
Keynes said that longer times of high unemployment can be experienced in any economy
due to the inadequate overall demand. Four components collectively make the economy’s output
of goods and services namely – private consumption, private investment, government purchases
of goods and services and net exports. So it is natural that if there is increase in the demand in
the economy, such increase will be accruing from one of the above four components. But in the
times of recession, purchasing power of the consumers goes down and the resulting expenditure
on such purchases reduces as the demand decreases in the economy. So in this case, when the
government purchasing will increase and all the other elements remains stable resulting into
increased productivity. It is the theory of involuntary unemployment. The reason for the
inflexibility of the wages in the UK can be the illusion of institutional grounds and the money as

per this theory of unemployment. It says that when the wage rates increases, the individuals are
unable to find the source of employment which unfolds from the scenario of the unemployment.
Thus, when the government is framing policies and procedures for the unemployment reduction,
the government of the United Kingdom shall focus on the concept of underemployment to allow
the flexibility of the wages and also allow the reduction in the unemployment of the country.
(Source: Middleton, 2018)
Naturally, the forming and implementation of the governmental rules and regulations has
led to the decrease in the rate of unemployment in the UK. The current unemployment rate in the
UK is 3.8%. It shall be observed that this unemployment rate was as high as 8.0% in 2012 which
decreased to 7.6% in 2013 which further decreased to 6.2% in 2014. 2015 showed further
reduction to 5.4% and 2016 which accounted for further decrease to 4.9% (The Main
Macroeconomic Objectives, 2021). Such unemployment rate decreased to further 4.4% in 2017
with further reduction to 4.1% in 2018 and 2019 showing further reduction to 3.8%. But the year
2020 and 2021 showed increase to 4.5% each year show casing the effects of the global
pandemic in the country over such unemployment rate.

The sustainable growth in the UK has been planned by the government with a view to
achieve reduction in the emissions in the nation to render a clean and healthy environment and so
that the people can live here happy and healthy lifestyle. The economic sustainable growth rate
in 2019 is 0.5% whereas in 2011 it was 1.5%. This shows the decline in the economic sustainable
growth rate. Such sustainable economic development is calculated with respect to the gross
domestic product in relation to the stability of the cost. The growth of the economy of the UK
depends upon the social developments, individual needs like employment and such individuals
need to be assisted with the information of appropriate growth policies available in the economy.
Here is the GDP of the last 10 years measure at chained volume in £m for the reference.

Application of Policies and Theories:
Fiscal policies need to be implemented by the UK government to achieve the objectives
of reduced unemployment and sustainable growth. Such fiscal policies will also involve fiscal
boost will result in the prevention of the national revenues being reduced (Kantabutra and
Ketprapakorn, 2020). The resultant decrease in the unemployment will lead to more payment of
taxes to the government by the individuals and the government will be able to have hands on the
increased revenues. Also, the reduction of rate of unemployment will be resulting in the increase
of the aggregate demand and the rate of economic development in the country.
The reduction in the rate of unemployment and sustainable development are the major
factors for the growth of the nation and the economy (Zhang, Zhang and Zhou, 2021). Also, the
precise implementation and execution of the fiscal policies can lead to improved rate of
unemployment in the UK as compared to the record of the last 10 years.
The application of sustainability theory assisted the government of the UK to be able to
improve the goals and objectives relating to the government policy objectives. The environment
in and around which the economy functions also impacts the lives of the people, the atmosphere
of the country and thus can affect the sustainable growth of the economy adversely therefore,
such sustainability theory shall be followed sincerely by the country to let the individuals live a
healthier life along with raised standards of living by addressing the issues like social equality,
social development conservation of natural resources, etc. The Keynes’s theory also allowed the
government of the UK to focus on reducing the unemployment in the country by focusing more
on the underemployment concept (Simionescu, Streimikiene and Strielkowski, 2020). Therefore,
the issue of increasing rate of the unemployment can be effectively addressed by this theory of
involuntary unemployment.
CONCLUSION
The above composed essay conclusively states that the monetary policies and fiscal
policies are very vital for the attainment of the objectives of sustainable growth and reducing
unemployment rate in the United Kingdom. Such expenditures, tax rates and economic stability
of the United Kingdom can be important factors of the current conditions of the economy
especially considering the effects of pandemic and Brexit. Therefore, such policies and theories
namely sustainability theory and Keynes’s theory of unemployment are of utmost importance for
improvement of the economic stability of the United Kingdom. The above essay and study

initiates with the introduction to the concepts of macroeconomics being an important concept to
be understood in terms of the growth of an economy. The research thus focusses on the
objectives of the UK government of sustainable growth and development and reduction in the
rate of unemployment and application of various policies and theories like fiscal policy,
monetary policy, sustainability theory and Keynes’s theory of unemployment for achievement of
such objectives. Sustainable economic growth is measure in terms of real GDP (Gross Domestic
Product) and sometimes GNP (Gross National Product) is also used as both are similar terms of
measurement of the economic growth. Relating to the unemployment rate in the UK, ILO
(International Labour Organisation) measure is used as it is more realistic. It is to be noted that
only the quantum of working population includes only the active members of the population of
the age of working. But some inactive members are also in this group of active members like
students and people who retire early before the official age of retirement therefore, eligible and
are able to work more. Now such working population includes workers employed in both the
manufacturing as well as the service industries and the variance in such number of workers in
these industries is large. According to the government of the UK, monetary policy and fiscal
policy are the main policy instruments through which it will be able to meet the macroeconomic
objectives of stable low inflation, sustainable growth by growing of real gross domestic product
and sustain the impact of such growth on the environment, high levels of employment, improved
productivity, improving the standard of living, reduction in the relative poverty and availing &
allowing sound government finances.

REFERENCES
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the UK. National Institute Economic Review. 243. pp. R53-R61.
Borisova, G. M., 2021. Comparative Study of Major Central Bank’s Monetary Policy in
Response to the Pandemic Crisis. Finance, Accounting and Business Analysis
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Borland, H., Bhatti, Y. and Lindgreen, A., 2019. Sustainability and sustainable development
strategies in the UK plastic electronics industry. Corporate Social Responsibility and
Environmental Management. 26(4). pp.805-818.
Gao, C. and Que, Y., 2022, March. Fiscal Policy and Monetary Policy of the UK. In 2022 7th
International Conference on Financial Innovation and Economic Development (ICFIED
2022) (pp. 2253-2257). Atlantis Press.
Haldane, A., 2018. How monetary policy affects your GDP. Finch Lecture at the University of
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Langella, M. and Manning, A., 2022. Residential mobility and unemployment in the UK. Labour
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Lee, K. S. and Werner, R. A., 2018. Reconsidering monetary policy: An empirical examination
of the relationship between interest rates and nominal GDP growth in the US, UK,
Germany and Japan. Ecological Economics. 146. pp.26-34.
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selected developed countries. International Journal of Environmental Science and
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Regan, T. and et.al., 2021. Genetic improvement technologies to support the sustainable growth
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about the impact of Brexit on the unemployment rate in the UK? Sustainability. 12(3).
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Online
Monetary policy. 2022. [Online]. Available through:
<https://www.bankofengland.co.uk/monetary-policy#:~:text=Monetary%20policy%20is
%20action%20that,us%20%E2%80%93%20this%20is%20Bank%20Rate.>
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