Macroeconomic policy framework

The concept of macroeconomic policy strategy is here introduce to student, 

under which the two main policies (i.e. fiscal and monetary policies) being used 

by various economies is introduced to the student. The study shall assess the 

objectives of macroeconomics policy and the problem that arise when these 

objectives come into conflict with each other.

At the end of this unit student should be able to;

i) Explain what is meant by macroeconomic policy framework. 

ii) Differentiate between monetary policy and fiscal policy.

iii) Understand the working of monetary and fiscal policy transmission mechanism

iv) Understand the relationship between fiscal and monetary policy. 

v) Understand different instrument and their applications

vi) Understand the effect of a sound monetary institutions and fiscal

discipline.

MACROECONOMIC POLICY (Overview)

Macroeconomic policy refers to program through which government uses policy 

instrument to regulate or modify the economic affair of the country in keeping 

with certain objectives. In other words, it ―attempts to assess the behaviour of the 

economy as a whole and to seek ways in which its aggregate performance might be improved.‖ These are achieved through certain instrument and objectives of 

macroeconomic policy. Its two main instruments are monetary and fiscal policy, and its four major objectives are full employment, price stability, economic 

growth, and balance of payments equilibrium and recently adjudge fifth 

objective is equitable income redistribution. The study shall assess the 

objectives of macroeconomics policy and the problem that arise when these 

objectives come into conflict with each other.

Self Assessment Exercise

i. In your own opinion why do any economy need macroeconomic policy?

ii. Examine the impact of macroeconomic framework on achievement of economy stability

iii. Differentiate between policy framework and policy objectives

THE FISCAL POLICY

Fiscal policy refers to government deliberate use of budgetary tools to regulate the economic activities. Budget is the annual financial statement of government proposed expenditure and expected revenue. Fiscal activities is the use fiscal tools or instrument to allocate or re-allocate financial resources in an economy within a span of a year, it involves government spending or expenditure and revenue through taxation. Fiscal policies of increase in government expenditure and or reduction in taxes are used to solve problem of unemployment and the effects of tax reduction or increased government expenditure is rise in aggregate demand. An increase in aggregate demand will lead to increased productive capacity and used of resources. This will increase employment opportunities. 

Fiscal policy of reduction in government expenditure and or increase in taxes 

will reduce the disposable income with the consumers. This will reduce aggregate demand and reduce inflationary pressure. The institution charge with this responsibility is the government through the ministry of finance. It should be noted that fiscal policy thrust stream from governmental budgetary allocation, 

which in Nigeria today, there are eight hundred and eleven (811) budget being 

read on annual basis, this could over shoot or under shoot the desire of the central government whose budget is paramount to the macroeconomic stability, however, other government budget such as thirty six states, seven hundred and seventy four local governments and one federal capital territory will also have enormous influence on the direction of the aggregate economy.

Self Assessment Exercise

i. What is fiscal policy and what are the instruments used?

ii. Examine the Nigeria federalism in the light of 811 budget being read 

every year.

iii. What can be done in your own view to converge the all budgetary allocation in the country?

iv. Enumerate and explain reasons why each government must have its own budgets

v. Explicitly explain what a good budget must contain.

THE MONETARY POLICY

Monetary Policy is the deliberate use of monetary instruments (direct and indirect) at the disposal of monetary authorities such as central bank in order to achieve macroeconomic stability - Macroeconomic stability refers to achievement of internal and external Balance - Internal Balance here refers to:- price stability (Low inflation) - Low unemployment - High and stable Economic growth - External balance - Balance of payment equilibrium - Exchange rate stability. Monetary policies can also be used to solve the problems of inflation and unemployment. Inflationary pressure can be tackled using contractionary monetary policies e.g. increased interest rate and or sales of government treasury bills in the open market. For expansionary monetary policies increased interest rate, purchase of treasury bills and reduction of minimum reserve requirement can be used to solve the problem of unemployment. Both contractionary and expansionary are applied in accordance to the perceived macroeconomic problem to seek lasting solution and achieve macroeconomic equilibrium. Every monetary authority must ensure that macroeconomic stability is achieved at all time and must project what some macroeconomic indicator should be at any particular point in time. However, if in reality the economy is moving away from its projected path, then monetary authority will swing into action to to correct the abnormality and redirect the economic towards achieving set priority and equilibrium, it should be noted that achievement of monetary policy is largely dependent on the financial sector development and stability.

Self Assessment Exercise

i. What is monetary policy?

ii. What are major tools of monetary policy?

iii. Who are the key players in discharge monetary policy responsibility?

iv. Analyze the monetary policy transmission mechanism of using interest 

regulation to target inflation.

Conclusion

This unit is explained the macroeconomic policy instrument, the unit mainly looked at fiscal and monetary policy instrument. The fiscal policy has to do with government policy of taxation and spending to regulate the economic activities, while the monetary policy has to do with regulating the economy through the adjustment of monetary variables by the monetary authorities.

Summary

This unit explored the macroeconomic policy objectives and explain in the

details the monetary and fiscal policies adjustments and their transmission 

mechanisms, the unit equally explored the fundamentally the players involve in 

the stabilization of macroeconomic stabilization.

Marked Assignment

i) Differentiate between monetary and fiscal policy.

ii) List and explain the instruments of monetary and fiscal policies. 

iii) Evaluate macroeconomic policy objectives

iv) Who are the key players in discharge monetary policy responsibility?

v) Analyze the monetary policy transmission mechanism of using interest 

regulation to target inflation.

vi) What can be done in your own view to converge the all budgetary allocation in the country?

vii) Enumerate and explain reasons why each government must have its on budgets.

viii) Explicitly explain what a good budget must contain.

ix) Explain what is meant by macroeconomic policy framework. 

x) Differentiate between monetary policy and fiscal policy.

xi) Understand the working of monetary and fiscal policy transmission mechanism

xii) Understand the relationship between fiscal and monetary policy. 

xiii) Understand different policy instruments and their applications

xiv) Who are the key players in the monetary policy regulation and implementation?

xv) Who are the key players in the fiscal policy regulation and implementation?

xvi) What does the CBN monetary policy committee do?

References/Further Readings

Attah B.O, Bakare, T.A. & Daisi, O.R., (2011); Anatomy of Economics 

Principles, Q&A (Macroeconomics), Raamson Printing Press, Oke-Afa, Isolo, 

Lagos, Nigeria

Amacher, R and Ulbrich, H, (1986); Principles of Economics, South Western

Publications Co. Cincinnafi, Oliso

Bakare –Aremu T.A, (2013); Fundamental of Economics Principles

(Macroeconomics), Raamson Printing Press, Oke-Afa, Isolo, Lagos, Nigeria

Bakare I.A.O, Daisi, O.R., Jenrola, O.A., & Okunnu, M.A., (1999): Principles 

and Practice of Economics (Macro Approach), Raamson Printing Press, 

Mushin, Lagos, NigeriaDennis R. A. et-al; International Economics, Mcgraw 

Hill Irwin, 8th edition.

Familoni K.A, (1990); Development in Macroeconomics Policy, Concept

Publications, Lagos, Nigeria

Fashina E.O, (2000); Foundations of Economics Analysis (Macro Theories),

F.E.F International Company, Ikeja, Lagos, Nigeria