What Macroeconomic Problems Do Policymakers Most Commonly Face?

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Macroeconomics addresses large-scale economic factors that affect the overall population. Policymakers, therefore, have to make macroeconomic decisions such as setting interest rates and balancing a country's inflation with both its trade and the foreign exchange rate.

Establishing financial conditions that facilitate an increase in private sector investment also helps policymakers to increase economic growth while reducing poverty. Policymakers must take many factors into account when tackling wide problems such as unemployment, inflation, and a country's current gross domestic product (GDP). Below we discuss some of the main macroeconomic problems that policymakers face.

Key Takeaways

• Large-scale economic factors that impact the entire population are classified as macroeconomics.
• Policymakers take into consideration all macroeconomic factors, such as inflation, interest rates, and trade balances when setting macroeconomic goals.
• The goal of policymakers is to spur economic growth, reduce poverty, and maintain a healthy level of inflation.
• Setting appropriate taxes and avoiding recessions and depressions are also two objectives of policymakers.
• Two views of economics are generally taken into consideration when establishing macroeconomic policy: Keynesian economics and classical economics.
  

Keynesian vs. Classical Economics

Philosophies on how to accomplish growth and a healthy economy vary. Keynesian economic policies recommend that a government run a budget surplus during times of financial prosperity and a deficit during a recession.

Classical economic policies take a more hands-off approach during a recession, believing that the markets correct themselves when left unimpeded and that excessive government borrowing or intervention negatively affects the market potential for recovery.

Policymakers, therefore, have to reach some agreement or settlement with one another on what approaches to take at any given time.

Taxation

The use of taxation as a macroeconomic tool is a hotly debated topic amongst policymakers since tax rates have a large effect on overall financial conditions and the government's ability to balance a budget.

Supply-side economic theories, essentially the opposite of Keynesian theories, argue that higher taxes pose a barrier to private investment, and therefore hinder the growth that is essential to a healthy economy. However, lower taxes mean that the government has less money to spend, which potentially increases the deficit due to more government borrowing.

This was seen during the early 1980s when Ronald Reagan cut taxes and increased military spending as a means of stimulating the economy. As a result, the government was required to run a deficit to accommodate the increased spending with less revenue.

Recessions and Depressions

Policymakers always want to avoid a depression, which occurs when there has been an extremely severe recession. A depression typically brings with it increased unemployment, increased poverty, reduced credit, a shrinking GDP, and overall economic volatility.

Reduced investor confidence makes it increasingly difficult to get capital back into the economy to restimulate growth. Policy changes are often needed in this instance to stabilize the economy and reverse the effects of the prolonged recession.

3.5%

The unemployment rate in the U.S. as of July 2023.

A famous example is the Great Depression of 1929 in the United States. As a result of the stock market crash and the resulting fallout, Franklin D. Roosevelt and other policymakers created the Federal Deposit Insurance Corporation (FDIC) and the Securities and Exchange Commission (SEC) to protect banking deposits and regulate stock market trading.

Government spending also increased as World War II began, and these changing conditions helped reverse the depression economics of the previous years.

What Are Examples of Macroeconomic Policies?

Examples of macroeconomic policies include fiscal (government) policies, such as tax increases or tax cuts, and monetary (central bank) policies, such as increases or decreases in interest rates.

What Are the Key Macroeconomic Policy Issues?

Key macroeconomic policy issues focus on gross domestic product (GDP), inflation, and unemployment. Policymakers seek to grow GDP, maintain inflation at healthy levels, and reduce unemployment.

What Are the Main Tools of Macroeconomic Policy?

The main tools of macroeconomic policy fall under government policies, known as fiscal policy, and central bank policies, known as monetary policy. Governments set taxes and manage their spending to force a certain economic outcome. Central banks control the money supply and set interest rates to do the same.

The Bottom Line

Policymakers have a difficult job when it comes to macroeconomics. Economic factors are interrelated in so many ways that a change in one factor can have unintended consequences on multiple others. Policymakers, therefore, have to maintain a fairly delicate balancing act while trying to tip the scales toward economic growth in ways that do not increase overall economic volatility.

1. Office of Management and Budget. "Historical Tables: Budget of the U.S. Government, Fiscal Year 2010," Page 5.
2. Bureau of Labor Statistics. "The Employment Situation."
3. Federal Deposit Insurance Corporation. "History of the FDIC."
4. Securities and Exchange Commission Historical Society. "Timeline."
5. Office of Management and Budget. "Historical Tables: Budget of the U.S. Government, Fiscal Year 2010," Page 7.

An economic depression is a steep and sustained drop in economic activity featuring high unemployment and negative GDP growth.

Net national product (NNP) is the total value of finished goods and services produced by a country's citizens overseas and domestically, minus depreciation.

The poverty gap reflects the intensity of poverty in a nation, showing the average monetary shortfall of the total population from the official poverty line.

Dollarization takes place when the U.S. dollar is used along with or instead of a country's domestic currency.

The Consumer Confidence Index (CCI) is a survey that measures how optimistic or pessimistic consumers are regarding their expected financial situation.

The ZEW Indicator of Economic Sentiment aggregates the sentiments of about 350 economists and analysts regarding Germany's short-term economic future.

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