Macroeconomic Policy can be defined as a programme of action undertaken to control, regulate and manipulate macroeconomic variables to achieve macroeconomic goals of the society. It is in fact an instrument of policing the economy to achieve certain economic goals.
The scope of the policy includes all major macroeconomic variables.
Macroeconomic variables include both real and monetary variables.
Monetary policy is essentially a programme undertaken by the monetary authorities, generally the central bank, to control and regulate the supply of money with the public and the flow of credit with a view to achieving predetermined macroeconomic goals.
Scope of monetary policy depends upon:
1.The level of monetization of the economy
2.The level of development of the capital market
In a fully monetized economy, the scope of monetary policy encompasses the entire economic activities.
A developed capital market is one which has the following features:
1.Large no. of financially strong commercial banks, financial institutions, credit organizations, and short term bill market.
2.A major part of financial transactions are routed through the capital markets
3.The working of capital sub-markets is interlinked and interdependent
4.Commodity sector is highly sensitive to the changes in the capital market
Fiscal policy is the govt. programme of making discretionary changes in the pattern and level of its expenditure, taxation and borrowings in order to achieve intended economic growth, employment, income equality, and stabilization of the economy on a growth path.
Formulation of an appropriate fiscal policy requires reliable forecasting of the target variables. But no one has yet discovered a foolproof method of economic forecasting
The overall effect of changes in the policy instruments is determined by the rate of dynamic multiplier
Decision and execution lags in case of discretionary fiscal policy makes both working and efficacy of fiscal policy shrouded with uncertainty
The working and effectiveness of fiscal policies in underdeveloped countries is severely limited by low levels of income, small proportion of population in taxable income groups, the existence of a large monetized sector and all pervasive corruption & inefficiency in administration
In countries excessively pendent of fiscal policy, the govt. is forced to have recourse to internal and external borrowings and deficit financings