10.0 Economic Policy

© 1999-2020, Douglas A.Ruby (06-16-2020)

Economics and microeconomics in particular is about decision-making. Decisions that are unavoidable from the moment we wake up and choose whether or not to get out of bed and decisions that are necessary in the face of scarcity and scarce resources. Decision-making and selecting one choice over another is an inescapable part of human activity. Economics helps us better understand the choices that we make.

Macroeconomics, on the other hand, is about policy-making. This is a more discretionary part of human social activity. These policies are a response to an assessment that for the economy as a whole: the rate of economic growth is too sluggish or negative, prices are rising too quickly (inflation) or falling (deflation), unemployment rates are too high (lost output), or the dollar is either too weak (hurting importers and a cause of inflation) or too strong (hurting exports and growth).

There is still great debate about the degree to which a government or policy makers should intervene in the affairs of a market economy. At one extreme are those who believe that the market when left alone will generate stable economic growth, rising living standards, low levels of unemployment and inflation, and continue to use resources in the most efficient manner possible. The other extreme is characterized by those who believe that the aggregate economy is vulnerable to adverse shocks, financial panics and various forms of animal spirits. Combined with various forms of market failure, those at this other extreme advocate in rigorous planning, policy implementation, and in some cases, national ownership of key industries.

This discussion will take more of a middle road; identifying situations where policy might be desirable or where the lack of policy actions will cause aggregate harm. We will discuss s situations where one type of policy might be desirable as compared to others and situations where certain types of policy is just not practical.

Macroeconomic policy can be divided into two broad categories:

Further, Demand-side policies can be broken down into:

Concepts for Review:

Top of page related: Macroeconomic Policy next: Demand-side Policy Macroeconomic Theory
© 1999-2020, Douglas A.Ruby (05-20-2020)