What Are The Tools Of Macroeconomic Policy?

There are two major tools of macroeconomics policy.Begin with fiscal policy, which denotes the use of taxes and government expenditures. Government expenditures come in two distinct forms. First there are government purchases. These compromise spending on goods and services purchases of tanks, construction of road, salaries for judges, and so forth. In addition, there are government transfer payments, which boost the incomes of targeted groups such as the elderly or the unemployed.

Government spending determines the relative size of the public and private sectors, that is, how much of our gross domestic product is consumed collectively rather than privately. From a macroeconomic perspective, government expenditures also affect the overall level of spending in the economy and thereby influence the level of gross domestic product.

The second major instrument of macroeconomic policy is monetary policy, which government conducts through the management of the nation's money, credit, and banking system. You may have read how our central bank, the Federal Reserve System, operates to regulate the money supply. But what exactly is the money supply? Money consists of the means of exchange or method of payment.