Answer to Question #178245 in Macroeconomics for Salman

Question

Macro economic policies (fiscal and monetary policies) in the new Keynesian approach?

Answer 1

Macroeconomic policy relating to fiscal policy are taxation and government spending. When the government wants to regulate how much money individuals can spend or how much money it can spend, it uses fiscal policy. Fiscal policy is used to promote macroeconomic stability by sustaining demand and incomes during an economic downturn and by moderating economic activity during periods of strong growth.

There are four tools used to achieve monetary policy goals which are the discount rate, reserve requirements, open market operations, and interest on reserves. They all relate to the banking system and central banks.They are used to create liquidity to increase economic growth or reduce liquidity to reduce inflation.