The macro-economic tools avialable to policymakers are listed below Although the list is brief,
we hardly need a reminder at this point how powerful each instrament can be. Every one of these major policy instraments can
significantly change our answers to the basic economic questions of What,How, and For Whom to produce.
TYPE OF POLiCY
Policy instaments
Fiscal----------------------------------- Tax cuts and increases---changes in goverment spending
Monetary------------------------------ Open market operations---reserve requirements--Discount rates
Supply-side-------------------------- Tax incentives for investment and saving--- Deregulation--- Education and
training---Immigration--- Trade policy
The basic tools of fiscal policy are contained in the federal budget. Tax cuts are suppose to
stimulate spending by putting more income in the hands of consumers and businesses. Tax increases are intended to curtail
spending and reduce inflationary pressures.
The expenditure side of the federal budget provides another fiscal-policy tool. Increases in
goverment spending raise aggregate demand and so encourage more production. A slowdown in goverment spending restrains aggregate
demand, lessining inflationary pressures. With goverment spending approching $2 trillion a year,( this info was copyrighted
in 2002), changes in the federal budget can influance aggregate demand significantly. The 1997 fiscal- policy package for
example, reduced projected goverment spending by $200 billion over a period of five years. With multiplier effects, such spending
cutbackes significantly reduced aggregate demand. These negative effects were offset, however, with $706 billion in tax cuts.
Changes in the budget don't necessarily originate in presidentail decisions or congressional
legislation. Tax revenues and goverment outlays also respond to economic events. --- When the economy slows, tax revenues
decline, and goverment spending increases automatically---. The recession of 1990-91, for example, displaced 2 million workers
and reduced their incomes millions more. As their incomes fell, so did their tax liabilities. As a consequance, goverment
tax revenues fell.
The recession also caused goverment spending to rise. The swollen ranks of unemployed workers
increased outlays for unemployment insurance benefits, welfare, food stamps and other transfer payments. None of this budget
activity required new legislation. Instead, the benefits were increased automaticaly under laws already written. No new policy
was required.