Difficulties in Formulating Macroeconomic Policy :: Economics Policy Making Essays

Difficulties in Formulating Macroeconomic PolicyPolicy makers try to influence the behaviour of long economicaggregates in order to improve the performance of the economy. Themain macroeconomic objectives of form _or_ system of government are a high and relativelystable level of vocation a stable general price level a growinglevel of real income (economic growth) balance of paymentsequilibrium, and certain distributional aims. This essay will go through what these difficulties are and examine howthese difficulties affect the policy maker when they attempt toformulate macroeconomic policy.It is difficult to provide a single decisive part for policyevaluation as a change in political and/or economic circumstances mayresult in declared objectives beingness changed or reversed. Economists can give advice on the feasibility and desirability ofpolicies designed to attain the ultimate targets, however, theultimate responsibility lies with the policy maker. Policy makers are continually trying to formulate policies that willhelp the economy achieve these objectives. However, there arenumerous difficulties which policy makers are faced with.In a elective society like the UK, the macroeconomic objectives arenot under the sole control of the Government. For example, the levelof use of goods and services depends on the decisions not only of the government(e.g. for employment in the public sector) but also of private firmsas to how many workers they wish to employ. Also, membership to transnational organisations (i.e. WTO or EU etc.) means that theinternational regulations and directives must(prenominal) be adhered to and cannotbe altered. Therefore, the freedom of action of the policy maker isrestricted, as the new policy must function along side existinginternational policies.Most policies are designed against the background of a theoreticalmodel. However, there is no true model and so different policymakers and economists may collect different views to certain e conomicvariables. Therefore, each policy maker will formulate differentpolicies based on their views in order to achieve the identical objective. For example, Keynesians view that consumption expenditure depends uponcurrent disposable income. Whereas Milton Friedman argued thatconsumption is related to permanent rather than current income. Hewas therefore more sceptical some he usefulness of a tax change forstabilisation purposes than one who believes that consumption dependson current disposable income.Policy makers usually use pecuniary policy to alter the level, timing orcomposition of government expenditure and/or the level, timing orstructure of tax payments. And they useMonetary policy to alter the supply of money and/or credit and also toalter interest rates.But some policies are not always successful a good example was thedecision to use monetary policy to solve the liquidity trap. Thispolicy aimed to reduce interest rates and stimulate investment