COURSE CODE: BEC 112

COURSE NAME: PRINCIPLES F MACROECONOMICS

THE MAIN GOALS OF MACROECONOMICS IN AN ECONOMY

FISCAL INSTRUMENTS NEEDED FOR ECONOMIC STABILITY IN A
COUNTRY
REASONS WHY THE STUDY OF ECONOMICS IS USEFUL TO
INDIVIDUALS, FIRMS AND THE COUNTRY

Table of Contents
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THE MAIN GOALS OF MACROECONOMICS IN AN ECONOMY......................................2

FISCAL INSTRUMENTS NEEDED FOR ECONOMIC STABILITY IN A COUNTRY................3
REASONS WHY THE STUDY OF ECONOMICS IS USEFUL TO INDIVIDUALS, FIRMS AND
THE COUNTRY........................................................................................................ 8

THE MAIN GOALS OF MACROECONOMICS IN AN ECONOMY

1. Economic growth
It is the growth in the size of the overall economy of a country. The measuring scale of a
countrys development is its growth and size of its economy. The ultimate aim of any country
in the world is to strive and create maximum wealth by using minimum resources. If the
growth in real output of a country is more than the growth of its population, the standard of
living becomes higher.
2. Maximum employment for its citizens
The fundamental aim of an economic system is to empower the citizens of a country to earn
and create wealth. (Marjankhan, n.d.). Only employment to all the citizens gives the power
to do this. If the overall employment of citizens is high, it will result in a greater amount of
goods and services available for the population as a whole. Greater employment results in
greater money flow and transactions thereby resulting in even greater employment.
3. Price stability (controlling inflation)
Inflation is basically the price rise of the products and services available in a country.
Increasing inflation pushes the buying power of money downwards. This results in the
population spending more and more of their hard-earned money for the same products and
services available. Inflation has a detrimental effect on the economy because it increases
uncertainty on returns and costs which results in decreasing investments.
4. External Balance
Exports, Imports and other various capital outflows and inflows must be in balance between
the country and the rest of the world. Yes, there is a conflict between achieving all of them at
the same time. Economic growth is the prime motto of all nations of the world. But the
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various efforts taken to boost the growth of the economy will affect the inflation and
unemployment. If not controlled properly, higher economic growth will lead to higher
inflation. In the long run, higher inflation does not promote employment or economic
growth. Price stability (low inflation or inflation under control) promotes financial stability
and economic growth. A negative external balance will destabilize the overall economy of the
country in the years to come.
FISCAL INSTRUMENTS NEEDED FOR ECONOMIC STABILITY IN A COUNTRY
Arthur Smithies defines fiscal policy as a policy under which the government uses its
expenditure and revenue programmes to produce desirable effects and avoid undesirable
effects on the national income, production and employment. Though the ultimate aim of
fiscal policy in the long-run stabilization of the economy, yet it can be achieved by
moderating short-run economic fluctuations. In this context, Otto Eckstein defines fiscal
policy as changes in taxes and expenditures which aim at short-run goals of full employment
and price-level stability. (Chand, 2015)
The main instruments of fiscal policy are discussed below:
1. Taxation
Taxation is a powerful instrument of fiscal policy in the hands of public authorities which
greatly effect the changes in disposable income, consumption and investment. An antidepression tax policy increases disposable income of the individual, promotes consumption
and investment. Obviously, there will be more funds with the people for consumption and
investment purposes at the time of tax reduction.
This will ultimately result in the increase in spending activities i.e. it will tend to increase
effective demand and reduce the deflationary gap. In this regard, sometimes, it is suggested to

reduce the rates of commodity taxes like excise duties, sales tax and import duty. As a result
of these tax concessions, consumption is promoted.
There are two types of taxes: Direct and indirect tax. Indirect taxes are those imposed by a
government on goods and services, in contrast to direct taxes, such as income and corporation
tax, which are levied on incomes of households and firms. Indirect taxes are also called
expenditure taxes.
2. Public Expenditure:
Public expenditure is spending made by the government of a country on collective needs and
wants such as pension, provision, infrastructure, etc. (Public expenditure, 2015)
The active participation of the government in economic activity has brought public spending
to the front line among the fiscal tools. The appropriate variation in public expenditure can
have more direct effect upon the level of economic activity than even taxes. The increased
public spending will have a multiple effect upon income, output and employment exactly in
the same way as increased investment has its effect on them. Similarly, a reduction in public
spending, can reduce the level of economic activity through the reverse operation of the
government expenditure multiplier.
(i) Public Expenditure in Inflation:
During the period of inflation, the basic reason of inflationary pressures is the excessive
aggregate spending. Both private consumption and investment spending are abnormally high.
In these circumstances, public spending policy must aim at reducing the government
spending. In other words, some schemes should be abandoned and others be postponed. It
should be carefully noted that government spending which is of productive nature, should not
be shelved, since that may aggravate the inflationary dangers further.
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However, reduction in unproductive channels may prove helpful to curb inflationary

pressures in the economy. But such a decision is really difficult from economic and political
point of view. It is true, yet the fiscal authority can vary its expenditure to overcome
inflationary pressures to some extent.
(ii) Public Expenditure in Depression:
In depression, public spending emerges with greater significance. It is helpful to lift the
economy out of the morass of stagnation. In this period, deficiency of demand is the result of
sluggish private consumption and investment expenditure. Therefore, it can be met through
the additional doses of public expenditure equivalent to the deflationary gap. The multiplier
and acceleration effect of public spending will neutralize the depressing effect of lower
private spendings and stimulate the path of recovery.
3. Public Debt:
Public expenditure is spending made by the government of a country on collective needs and
wants such as pension, provision, infrastructure, etc. Public debt is a sound fiscal weapon to
fight against inflation and deflation. It brings about economic stability and full employment
in an economy.
The government borrowing may assume any of the following forms mentioned as under:
(a) Borrowing from Non-Bank Public:
When the government borrows from non-bank public through sale of bonds, money may flow
either out of consumption or saving or private investment or hoarding. As a result, the effect
of debt operations on national income will vary from situation to situation. If the bond selling

schemes of the government are attractive, the people induce to curtail their consumption, the
borrowings are likely to be non inflationary.
When the money for the purchase of bonds flows from already existing savings, the
borrowing may again be non-inflationary. Has the government not been borrowing, these
funds would have been used for private investment, with the result that the debt operations by
the government will simply bring about a diversion of funds from one channel of spending to
another with the similar quantitative effects on national income.
If the government bonds are purchased by non bank individuals and institutions by drawing
upon their hoarded money, there will be net addition to the circular flow of spending.
Consequently, the inflationary pressures are likely to be created. But funds from this source
are not commonly available in larger quantity. Its main implication is that borrowings from
non bank public is more advantageous in an inflationary period and undesirable in a
depression phase. In short, the borrowing from non bank public are not of much significant
magnitude whether it comes out of consumption, saving, private investment or hoarding.
(b) Borrowing from Banking System:
The government may also borrow from the banking institutions. During the period of
depression, such borrowings are highly effective. In this period, banks have excessive cash
reserves and the private business community is not willing to borrow from banks since they
consider it unprofitable.
When unused cash lying with banks is lent out to government, it causes a net addition to the
circular flow and tend to raise national income and employment. Therefore, borrowing from
banking institution have desirable and favourable effect specially in the period of depression
when the borrowed money is spend on public works programmes.
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On the contrary, borrowing from this source dry up almost completely in times of brisk
business activities i.e. boom. Actually, demand is very high during inflation period, since
profit expectation is high in business. The banks, being already loaded up and having no
excess cash reserves. Find it difficult to lend to the government. If it is done, it is only
through reducing their loans somewhere else.
This leads to a fall in private investment. As the government spending is off-set by a
reduction in private investment, there will be no net effect upon national income and
employment. In nut shell, borrowing from banking institutions have desirable effect only in
depression and is undesirable or with a neutral effect during inflation period.
(c) Drawing from Treasury:
The government may draw upon the cash balances held in the treasury for financing
budgetary deficit. It demonstrates dishoarding resulting in a net addition in the supply of
money. It is likely to be inflationary in nature. But, generally, there are small balances over
and above what is required for normal day to day requirements. Thus, such borrowings from
treasury do not have any significant result.
(d) Printing of Money:
Printing of money i.e. deficit financing is another method of public expenditure for
mobilizing additional resources in the hands of government. As new money is printed, it
results in a net addition to the circular flow. Thus, this form of public borrowing is said to be
highly inflationary.
Deficit financing has a desirable effect during depression as it helps to raise the level of
income and employment but objection is often raised against its use at the time of inflation or

boom. Here, it must be added that through this device, the government not only gets
additional resources at minimum cost but can also create appropriate monetary effects like
low interest rates and easy money supply and consequently economic system is likely to
register a quick revival.
REASONS WHY THE STUDY OF ECONOMICS IS USEFUL TO INDIVIDUALS, FIRMS
AND THE COUNTRY

To individuals
Economics involves the study of how to allocate scarce resources in order to satisfy unlimited
wants. The study of economics therefore helps the individual make choices regarding how to
allocate the scarce resources so as to satisfy his wants
Economics also involves the study of the trends in the prices of goods and services in a
market. A study in economics enables the individual knw when to buy commodities du to
changes in price. When demand for a commodity is low the prices will be low. The individual
can therefore decide whether to buy the goods or services due to the fall in prices.
The study of economics enables the individual to make investment decisions. The study of
economics will enable the individual make decisions on whether to buy shares in the stock
exchange due to fall in the price of shares. The stusy also gives the individual the know-how
required to make informed speculation in regrds to the stock market.
To firms
The study of economics enables firms know how to maximize profits. In economics, the firm
needs to know the equilinbrium quantities and prices, that is the quantity that must be sold to

maximize profits, and the price at which these commodities must be sold in order to
maximize profits. This is where the quantity demanded is equal to the quantity sold.
It also enabled the firms to gain a competitive edge. The study of economics involves the
assessment of the customers needs and how they can be satisfied. For instance, a study in the
change in tastes and preferences will enable a firm to modify their products, hence win more
customers than their competitors.
It enables firms to make wise investment decisions. If the cost producing a commodity
locally is high, a firm that has studied economics may decide to import commodities and
resell to make maximum profits. If the government lowers the taxation of raw material in
order to promote local investment, the form can decide to produce more so as to earn higher
profits
To the government.
Studying economics enables the government make economic policies. The study of
economics provides crucial data that forms a basis of both fiscal and monetary policies. For
example, the government can determines bank interest rates so as to control the flow of
money in the economy
It helps the government to promote local industries and businesses. This is made possible by
discouraging importation by levying heavy taxes on imports of commodities that can be
obtained in the country.
Through the study of economics, the government ensures equitable distribution of resources
in all regions of the country. The government does this by allocating more resources to
regions with lower per-capita income, an indicator of the standards of living of people in a
given region in a particular year.
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It helps the government encourage the well-being of its citizens. The government may want
to promote the health of its citizens by discouraging the consumption of harmful substances
such as cigarettes and alcohol. It achieves this by taxing such commodities heavily so as to
increase their prices.

References
Chand, S. (2015). Fiscal Policy: Meaning, Objectives and Other Information | Article on
Economics. Retrieved November 19, 2015, from
http://www.yourarticlelibrary.com/economics/fiscal-policy-meaning-objectives-andother-information-article-on-economics/29231/
Marjankhan. (n.d.). Basic Economics Goals of a Country. Retrieved from
http://econtutorials.com/blog/basic-economics-goals-of-a-country/
Public expenditure. (2015, November 6). In Wikipedia, the free encyclopedia. Retrieved from
https://en.wikipedia.org/w/index.php?title=Public_expenditure&oldid=689305891

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