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In other words, because of different level of aggregation, these two branches of economics focuses on different economic objectives. Performance of any government is judged in terms of goals of achieving full employment and price stability.

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These two may be called the key indicators of health of an economy. In other words, modern governments aim at reducing both unemployment and inflation rates. Full employment, thus, does not mean that nobody is unemployed. Full employment, though theoretically conceivable, is difficult to attain in a market-driven economy. This level is called the natural rate of unemployment. The emphasis has shifted to price stability.

Macroeconomic Policy

By price stability we must not mean an unchanging price level over time. However, it is difficult again to define the permissible or reasonable rate of inflation. This goal prevents not only economic fluctuations but also helps in the attainment of a steady growth of an economy. Economic growth in a market economy is never steady. These economies experience ups and downs in their performance.

This objective became uppermost in the period following the World War II In the short run such fluctuations may exhibit depressions or prosperity boom.


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One of the important benchmarks to measure the performance of an economy is the rate of increase in output over a period of time. A country seeks to achieve higher economic growth over a long period so that the standards of living or the quality of life of people, on an average, improve.

It may be noted here that while talking about higher economic growth, we take into account general, social and environmental factors so that the needs of people of both present generations and future generations can be met.

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However, promotion of higher economic growth is often hampered by short run fluctuations in aggregate output. In other words, one finds a conflict between the objectives of economic growth and economic stability in prices. In view of this conflict, it is said that macroeconomic policy should promote economic growth with reasonable price stability. From a macro- economic point of view, one can show that an international transaction differs from domestic transaction in terms of foreign currency exchange.

Over a period of time, all countries aim at balanced flow of goods, services and assets into and out of the country. Whenever this happens, total international monetary reserves are viewed as stable. When the country loses reserves, it experiences balance of payments deficit or imports exceed exports. However, depletion of reserves reflects the unhealthy performance of an economy and thus creates various problems.

That is why every country aims at building substantial volume of foreign exchange reserves.


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Anyway, the accumulation of foreign exchange reserves is largely conditioned by the exchange rate the rate at which one currency is exchanged for another currency to carry out international transactions. The foreign exchange rate should be stable as far as possible. This is what one may call it external stability in price. Macroeconomic policy financial definition of macroeconomic policy https: References in periodicals archive? The third new simulation is a Macroeconomic Policy Simulation and was developed under the faculty leadership of Professor Andy Abel.

The researchers find that countries with more macroeconomic policy space tend to use whatever policy instruments they have available much more aggressively in response to a crisis than countries with less space.


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