Economics Analysis for Economics Analysis for Managerial ApplicationsManagerial Applications

-Taught By:Ms.Dimple, Assistant Professor

FMS Department, NIFT Delhi

Macroeconomic Policy: Meaning & ScopeMacroeconomic Policy: Meaning & Scope

Macroeconomic Policy can be defined as a programme of action undertaken to control, regulate and manipulate macroeconomic variables to achieve macroeconomic goals of the society. It is in fact an instrument of policing the economy to achieve certain economic goals.

The scope of the policy includes all major macroeconomic variables.Macroeconomic variables include both real and monetary variables.

Real variables include:1.GNP gross national product. 2.Total employment.3.Aggregate expenditure.4.Savings & investment.5.Government expenditure.6.Tax & non-tax revenue.7.Exports & imports.8.Balance of payments.

Monetary variables include:1.Supply of money.RBI supplier.2.Demand for money.3.Supply of credit. Lending of commercial BANKS.4.Bank deposits.5.Interest rate.

Two kinds of tools are used to control macro-variables:1.Monetary measures-Interest rate,money supply.2.Fiscal measures-tax and government expenditure.

Objectives of macroeconomic policiesObjectives of macroeconomic policies

Economic growthHigh rate of employmentStabilization of Prices, Output & EmploymentEconomic equityStabilizing balance of payments

Objectives of the Indian macroeconomic Objectives of the Indian macroeconomic policypolicy

Achieving a growth rate of 5-6% per annum

Creating job opportunities for unemployed & underemployed

Removing economic disparityEradication of povertyControlling inflation and price stabilizationPreventing balance of payment

imbalances

Monetary PolicyMonetary Policy

Monetary policy is essentially a programme undertaken by the monetary authorities, generally the central bank, to control and regulate the supply of money with the public and the flow of credit with a view to achieving predetermined macroeconomic goals.

Scope of monetary policy depends upon:1.The level of monetization of the economy2.The level of development of the capital market

In a fully monetized economy, the scope of monetary policy encompasses the entire economic activities.

A developed capital market is one which has the following features:1.Large no. of financially strong commercial banks, financial institutions, credit

organizations, and short term bill market.2.A major part of financial transactions are routed through the capital markets3.The working of capital sub-markets is interlinked and interdependent4.Commodity sector is highly sensitive to the changes in the capital market

Instruments of monetary policyInstruments of monetary policy

The nuts and bolts of monetary policy are classified under two categories:

1.Quantitative measures.

2.Qualitative or selective credit controls.

Quantitative measures of Quantitative measures of Monetary controlMonetary control

Open market operations.dealswith govt dated security.

Discount rate or bank rate.rate at which RBI lends money to commercial banks.

Cash reserve ration (CRR)-7.5% SATUTORY LIQUIDITY RATIO,25%

Qualitative or selective credit Qualitative or selective credit controlscontrols

Credit rationing-priority lending.Change in lending marginsMoral Persuasion.Direct controls.

Transmission mechanism of monetary policyTransmission mechanism of monetary policy

Portfolio adjustment The keynesian approach The Monetarist approach

Limitations & Effectiveness of Monetary Limitations & Effectiveness of Monetary PolicyPolicy

The effectiveness of monetary policy, in practice, depends on the following limiting factors:1.The Time Lag2.Problems in Forecasting3.Non-Banking Financial Intermediaries4.Underdeveloped Money & Capital Markets

Fiscal PolicyFiscal Policy

Fiscal policy is the govt. programme of making discretionary changes in the pattern and level of its expenditure, taxation and borrowings in order to achieve intended economic growth, employment, income equality, and stabilization of the economy on a growth path.

Scope of Fiscal PolicyScope of Fiscal Policy

By the scope of fiscal policy, we mean the number of fiscal instruments and target variables.

Fiscal Instruments are variables that govt. can change and maneuver at its own discretion: They include:1.Budgetary surplus & deficit2.Govt. expenditure3.Taxation-direct & indirect4.Public Debt5.Deficit financing

Target variables are the macro variables that are intended to be changed to achieve the intended results.Fiscal Policy is implemented through fiscal instruments also called ‘Fiscal Handles’ and ‘Fiscal Levers’. The changes made in fiscal tools work through their linkage to the target variables

The target variables of fiscal policy are:1.Private disposable incomes.2.Private consumption expenditure3.Private savings & investment4.Exports & imports5.Level & structure of prices

The major Fiscal instruments include the following measures:1.Budgetary Balance policy2.Govt. Expenditure3.Taxation4.Public borrowings

Kinds of Fiscal PolicyKinds of Fiscal Policy

Fiscal Policy actions are classified under the following categories:1.Automatic Stabilization Fiscal Policy2.Compensatory Fiscal Policy3.Discretionary Fiscal Policy

Limitations of Fiscal PolicyLimitations of Fiscal Policy

Formulation of an appropriate fiscal policy requires reliable forecasting of the target variables. But no one has yet discovered a foolproof method of economic forecasting

The overall effect of changes in the policy instruments is determined by the rate of dynamic multiplier

Decision and execution lags in case of discretionary fiscal policy makes both working and efficacy of fiscal policy shrouded with uncertainty

The working and effectiveness of fiscal policies in underdeveloped countries is severely limited by low levels of income, small proportion of population in taxable income groups, the existence of a large monetized sector and all pervasive corruption & inefficiency in administration

In countries excessively pendent of fiscal policy, the govt. is forced to have recourse to internal and external borrowings and deficit financings

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