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Setting Macroeconomic Policies Essay

Inflation is a situation in the economy whereby the prices of goods and services continue rising while the income of consumers remain the same. During inflation times many people lose jobs and the cost of acquiring raw materials goes up resulting to increases in prices of commodities and many employees are laid off.

The government through the central bank should effect policies such as the monetary policy, fiscal policy and wage control policies that shall reverse this situation. The monetary policy is aimed at reducing the amount of money in circulation and reducing its supply by the central bank.

Initially, the government sets the inflation target and the Monetary Policy Committee forecasts the expected future inflation through economic statistics and imposes measures to curb it so as to meet the target (Pettinger 2007). One of the measures is increasing the interest rates if the inflation rate is expected to go beyond the target.

When the interest rates are high, they discourage people and banks from borrowing funds thus reducing money at their disposal. The high cost of borrowing imposed on commercial banks as they acquire funds from the central bank forces them to extend the cost to consumers, in terms of high interest rate.

On the other hand, the central bank should increase reserve requirements where the commercial banks are expected to keep a certain amount of money with the central bank. Under this policy, the amount is increased up to the level the banks will be able to reduce money in circulation.

Besides, the government can use the fiscal policy that involves increasing taxes coupled with a reduction on its expenditure. When taxes are increased, the amount of income at people’s disposal is reduced proportionately with the rate. This has the effect of decreasing the profits companies get, salaries and wages.

It’s worth noting that the government spends a lot of public funds on various projects such as construction of roads, electricity and telecommunication. This kind of expenditure increases money available to the public increasing the possibility of inflation in the economy. Hence, if the government could cut its expenditure on infrastructure and other projects, it could curb inflation effects.

Another policy is that of wage rate control where employers are required to pay their employees for labor service up to a given level. This too is aimed at decreasing the amount of money the employees can access at a given time. The implications of this policy are that, the employees’ purchasing power is limited.

Their demand for commodities is reduced and this pulls the prices down thereby curbing inflation. Finally, the government can employ supply side policies although they take time to reverse the effects of inflation (Pettinger 2007).

Unemployment is a situation where there are no jobs to people who have the skills and experience for such positions. This at times arises out of retrenchment where employers lay off some workers to reduce the costs of production so that they can maximize their profits.

This situation renders many people jobless affecting their living standards resulting to depression and suicidal attempts as those experienced during the great depression in the world economy.

The government should hold talks with the employers and ask them not to lay off their employees, but instead reduce their working hours when the demand for their goods and services goes down. In addition, the government should provide incentives to the private sector by lifting tax and other barriers to job creation (Weisbrot 2011). These barriers include licensing, registration, and other industrial regulations.

Lifting tax on the private sector has the effect of attracting investors from abroad to invest in the domestic country, creating more job opportunities. When taxes on the private sector are lifted their expenditure reduces significantly creating additional money to pay workers hence no need to lay them off.

The government can also take an unemployment insurance to cover the expenses by the private sector for retaining workers despite the looming economic turn-down.

The government can speed up the country’s GDP by ensuring that its projects and programs are finished in time as they contribute significantly to economic growth. On the other hand, it can limit imports allowing it only to capital goods that are not produced within the country or whose cost of production is high (Morrison 2006).

Also, employing cheap labor will help cut costs involved in the country’s production and also increase the production levels. This in return has the effect of creating employment opportunities for those who qualify for it.

Other approaches the government can take include economic reforms to ensure that mechanisms that have been devised are adhered to by employing the right people for the right jobs. Economic reforms also deal with ensuring that taxes are collected in time and at least everyone pays tax.

Taxes such as value added tax on commodities indirectly imposed on goods helps to create equality in the economy in the sense that, even the poor person who buys from the market is taxed. Removing price controls will also allow market demand and supply forces to determine prices as these controls are deemed by the employers as unfair to their businesses.

They in turn react by hoarding commodities until their prices rise significantly. Price controls are viewed by economists as temporal tools of curbing inflation which lead to shortages of essential commodities such as sugar, rice, flour among others.

When these shortages last for long, they impact negatively on the lives of the consumers leading to deteriorating health status especially of the poor from developing countries whose governments have complicated bureaucracies to correct such situations.

Investing in education has a role to play in healthcare, well-being and social care of people (Lardy 2007). This is because educated people are well equipped with basics of public health and this in return accords them good life. The government can also open up health facilities across the country to cater for the sick because it is believed that, a health nation has got health people.

Many people from developed countries have access to social care facilities and this enables them to enjoy quality lives. Hence the government should invest substantive funds of its budget on education, healthcare and social well being of its citizens if it has prospects of facilitating its GDP growth.

Finally, for the country to experience a stable growth in its GDP, then they need to revive their stock market. This has to do with first educating people on financial skills and how to be risk averse in portfolio management.

In case the stock market is revived, then they should allow at least 75 percent of their citizens and only 25 percent of foreigners to invest in the exchange market. This provides opportunities for the locals to grow economically.


Lardy, N 2007, China: Rebalancing economic growth, Peter Institute of International Economics.

Morrison, W 2006, . Web.

Pettinger, T 2007, . Web.

Weisbrot, M 2011, . Web.

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"Setting Macroeconomic Policies." IvyPanda, 30 July 2019, ivypanda.com/essays/setting-macroeconomic-policies-essay/.

1. IvyPanda. "Setting Macroeconomic Policies." July 30, 2019. https://ivypanda.com/essays/setting-macroeconomic-policies-essay/.


IvyPanda. "Setting Macroeconomic Policies." July 30, 2019. https://ivypanda.com/essays/setting-macroeconomic-policies-essay/.


IvyPanda. 2019. "Setting Macroeconomic Policies." July 30, 2019. https://ivypanda.com/essays/setting-macroeconomic-policies-essay/.


IvyPanda. (2019) 'Setting Macroeconomic Policies'. 30 July.

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