{{B}}MACROECONOMIC POLICIES{{/B}}
For most countries, the following four principal objectives of economic policy would apply: (1) Maintenance of employment at a high level. (2) Stable prices. (3) Economic growth. (4) Balance of payments equilibrium. These objectives are sometimes extremely difficult to achieve. A high level of employment, for example, tended to push wages and hence prices up. It also created an imbalance between exports and imports. Furthermore the competition among firms for labor tended to reduce labor productivity since workers were not always fully employed.
Government will differ in the emphasis they place on each of the above objectives. {{U}}(8) {{/U}}. At times when inflation was high, great stress was placed on bringing it down, but this had severe effects on jobs and on economic growth. The pursuit of an expansionary policy very often resulted in an increase in GDP and a fall in the level of unemployment; but was accompanied by a marked rise in the rate of inflation and a serious balance of payments deficit.
In carrying out its economic policy, the government uses two principal means--fiscal policy and monetary policy. {{U}}(9) {{/U}} Monetary policy is broadly neutral in its effects whilst fiscal and other measures can be used more discriminately--the redistribution of incomes and lower rates of corporation tax for small businesses are two examples.
Government regulation of the money supply is important for economic stability. Banks will wish to keep excess reserves when they do not foresee profitable and secure opportunities to make loans. This is likely to happen during the downswing and around the bottom of a business contraction. {{U}}(10) {{/U}}
During a recession, profit-oriented banks tend to reduce the money supply by increasing their excessive reserves if the central banks did not intervene. {{U}}(11) {{/U}}.
On the other hand, banks will want to squeeze possible money supply out of any given amount of cash reserves by keeping their reserves at the bare minimum when the demand for bank loans is buoyant, profits are high, and many investments suddenly start to look profitable. {{U}}(12) {{/U}} The authorities must intervene to prevent this. The monetary authorities can exercise monetary control in two ways: either they can attempt to control interest (i. e. the price of money) or they can endeavor to control the money supply.
A Fiscal policy is concerned with taxation, subsidies and government spending; monetary policy, in contrast, is concerned with interest rates, the money supply and bank lending.
B As the money supply is an important influence on aggregate demand such a contraction of money supply would exacerbate the severity of the recession.
C This reduced incentive to hold excess reserves in prosperous times means that during an economic boom, the behavior of profit-oriented banks is likely to make the money supply expand, adding undesirable momentum to the booming economy and paving the way for a burst of inflation.
D These objectives are sometimes extremely difficult to achieve.
E When this occurs, the prosperity of banks to hold excess reserves will turn the money creation process into one of the money destruction.
F For many years the main emphasis was on employment and balance of payments, but this adversely affected the pursuit of stable prices and economic growth.
G When adopting monetary policy, the central bank usually takes action to change the equilibrium of the money market, that is, to alter the money supply, move the interest rate, or do both.