The paper “ Role and Effects of Government in Economic Policy” is a thrilling variant of the case study on macro & microeconomics. The government of any country has a key role in steering the economy. It is precisely for this that the central banks of each country have been entrusted with the task of raising key rates – whether they are the prime lending rate or the interest and yields on government securities – or the cash reserve ratio (the number of central government securities that any bank must hold which is a measure of the liquidity of the bank).
As the world economy becomes tightly integrated and there is more complexity in the financial system with greater interconnectedness, it becomes imperative for any central banker to walk a tightrope when it comes to monetary policy. One of the most keenly watched events in the financial world is the quarterly interest rate hike/decrease and the credit policy that is announced by the central bank. Whether it was Alan Greenspan or Ben Bernanke in the US or the Bank of England’ s governor Mervyn King, they are like the “ conductors” to the orchestra of the economy. In this essay, we explore the linkages of the macro policies to the micro components of the economy.
This is done by taking the examples of three variables of the macroeconomic policy and their effect on three different actors. As we shall see, the linkages go deep. To put the essay in context, we are primarily dealing with three types of economic policy change namely: - The government makes a substantial rise in interest rates. - The government makes a substantial rise in income tax rates at all levels. - The local government, Birmingham, makes a substantial rise in its tax on business. All the three cases are instances of economic decisions that would be unpopular with business and industry but may have to be implemented nonetheless to contain inflation and prevent an upward spiral in the prices. In all the scenarios and for each business situation, the effects of the policy changes are felt in varying degrees.
If, for a particular economic change, a business situation is affected badly, for another situation the effect may not pinch that much but would affect it nonetheless.
1. Samuelson, Paul A.; William D Nordhaus (2004). Economics. McGraw-Hill. New York
2. "Monetary Policy Framework", Bank Of England, 2006.