Macroeconomic policy instruments

There are 4 main macroeconomic objectives: Low inflation, low unemployment, steady and sustained economic growth, equilibrium in government spending and BOP equilibrium.

Policy instruments:

Monetary policy: the use of exchange rates, quantitive easing, interest rates, the main aim is to control inflation.

Inflation targets: the Bank of England has set the guidline inflation rate for 2% +-1%, wherehas the ECB has a maximum rate of 2%.

EV: until 2007 this was regarded as an effective way of controlling inflation, however those countries that did not use it would not appear to suffer

EV: many economists regard CPI as to narrow, instead there should be a measure relating to other variables such as asset prices, in order to prevent asset bubbles occuring

Interest rate changes: Theseare used to achieve the inflation target, e.g if inflation is set to rise above its target then the interest rate will be increased in order to limit the amount of borrowing and spending

EV: the full effect of a interest rate change can take 18-24 months to set in

EV: can have significant impacts on investment

EV: can increase the exchange rate of a currency, making UK goods seem less attractive

Quantitive easing: the Central Bank buys government bonds from firms, in order to increase the amount of deposits and money supply, therefore firms are more likely to invest and also enable banks to create loans more easily.

EV: some banks may not be willing to take the risk of creating…