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As our macroeconomic goals are not typically confined to “full employment”, “price stability”, “rapid growth”, “BOP equilibrium and stability in foreign exchange rate”, so our macroeconomic policy instruments include monetary policy, fiscal policy, income policy in a narrow sense. But, in a broder sense, these instruments should include policies relating to labour, tariff, agriculture, anti-monopoly and other relevant ones that influence the macroeconomic goals of a country. Confining our attention in a restricted way we intend to consider two types of policy instruments the two “giants of the industry” monetary (credit) policy and fiscal (budgetary) policy. These two policies are employed toward altering aggregate demand so as to bring about a change in aggregate output (GNP/GDP) and prices, wages and interest rates, etc., throughout the economy. Monetary policy attempts to stabilise aggregate demand in the economy by influencing the availability or price of money, i.e., the rate of interest, in an economy. Monetary policy may be defined as a policy employing the central bank’s control of the supply of money as an instrument for achieving the macroeconomic goals. Fiscal policy, on the other hand, aims at influencing aggregate demand by altering tax- expenditure-debt programme of the government. The credit for using this kind of fiscal policy in the 1930s goes to J.M. Keynes who discredited the monetary policy as a means of attaining some of the macro- economic goals—such as the goal of full employment. As fiscal policy has come into scrutiny in terms of its effectiveness in achieving the desired macroeconomic objectives, the same is true about the monetary policy. One can see several rounds of ups and downs in the effectiveness of both these policy instruments consequent upon criticisms and counter- criticisms in their theoretical foundations.
It may be pointed out here that as there are conflicts among different macroeconomic goals, policymakers are in a dilemma in the sense that neither of the policies can achieve desired goals. Hence the need for additional policy measures like income policy, price control, etc. Further, while the objectives represent economic, social and political value judgements they do not normally enter the mainstream economic analysis. Ultimately, policymakers and bureaucrats are blamed as troubleshooters.
Kavungya answered the question on April 30, 2019 at 10:56