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Describe Major Macroeconomic Issues.
Ans:
Macroeconomic issues refer to those problems and issues that affect all sectors across
the economy. Among the major economic issues discussed and analyzed in
macroeconomics are problems of economics of economic growth and development,
issues relating to business cycles and economic stability, problems of inflation,
unemployment, poverty, etc. While the underdeveloped countries suffer from low
income, poverty and unemployment, the developed countries have the problems of
economic instability caused by recurrent business cycles. Here, we briefly outline some
of these major macroeconomic issues.
1. Economic Growth
The world today presents a picture of appalling contrasts. Nearly two-thirds of worlds
population has a claim on just about one fifth of global income. Consequently, this vast
chunk of world population lives in poverty and deprivation in countries that are called

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underdeveloped or developing nations. Thus, the problem of these poor countries is
to provide more income and better living to their people through economic growth and
development. This calls for macroeconomic policies to mobilize resources, both physical
and financial and channelizing those resources into improve productivity, enlarge
incomes, generate employment and thus improve countries, too, have to adopt policies
that maintain the tempo of growth that they have already achieved and thus prevent any
deviations and shortfalls from the long-run growth process.

2. Business Cycles
Whereas the problem with the underdeveloped countries is to increase tempo of
economic growth, the advanced countries have the problem of maintaining the high
growth rate already achieved and preventing economic instability or fluctuations in
economic activity caused by the business cycles. Business cycles refer to a series of ups
and downs in economic activity such as production, income, employment, etc. In the
advanced capitalist countries there are periods of boom or prosperity when production,
output, income and employment start declining. Recession culminates into depression
which is a phase of widespread unemployment, low production, low income and overall
contraction of economic activity. The job of macroeconomic policy is to minimize such
fluctuations and bring about economic stability or stable growth. Macroeconomics as a
branch of economics was in fact born out of this necessity to formulate policies that
could remove such economic fluctuations. Much of the study of macroeconomics is
associated with the name of J.M.Keynes who suggested ways and means to lift the
U.S. economy out of the depths of the Great Depression of 1930s.

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3. Inflation and Deflation
Inflation means rising prices and deflation is just the opposite of it. Rising prices or
inflation reduce purchasing power of the fixed income groups and cause them much
suffering. But slow and mild rise in prices also means increasing profitability or producers
that induces them to expand output and employment. Falling prices (deflation) act as
disincentive to production due to decrease in profitability. Thus, while some degree of
inflation may be good for production, rapidly rising prices may cause of purchasing
power and consequent low demand that is bound to have an adverse affect on
production, income and employment. Thus, the macroeconomic policy has to ensure
reasonable price stability that helps in maintaining steady profit expectations and higher
production levels. As observed by Lipsey and Chrystal.
Swings in economic activity have usually accompanied swings in inflation. Generally,
attempts by governments to control high inflation have tended to bring about
recessions An important policy problem for the governments is how to stimulate
economic activity without causing inflation.1

4. Unemployment
Unemployment is usually widespread in the underdeveloped countries due to such
factors as lack of adequate employment avenues in the underdeveloped industrial sector
low productive and primitive agriculture and painfully slow growth of the service sector.
The macroeconomic policy in this context would aim at rapid economic development with

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special emphasis on creating larger employment opportunities. Unemployment is also
found in the advanced or developed economic activity is known as cyclical
unemployment. The method to tackle this type of unemployment is to increase in
governments expenditure as well as reduction in taxes with a view to increase demand,
generating greater profit expectation among the producers and inducing them to
produce larger output with increased employment of labour.
5. Budgetary Deficits and Fiscal Policy
Macroeconomic policy to remove cyclical unemployment, as suggested above, aims at
increasing government spending and at the same time reducing taxes. This policy
regarding government spends more than what it earns by way of taxes, this excess of
expenditure over revenue is called budget deficit. This gap between spending and
earning (budget deficit) is largely met through public borrowings, i.e., government
raising loans from the market. The budget deficit was regarded as good because it
created more jobs but the deficit being continuously financed by borrowings raises the
burden of debt. The burden of debt refers to annual payment of instalments of debt as
well as the interest on debt, which is met through tax payers money. Thus, as the debt
burden increases more taxes are imposed as well as the rates of existing taxes are
raised. This places additional burden increases more taxes are imposed as well as the
rates of existing taxes are raised. This places additional burden on the taxpayers. And
unchecked government borrowings may ultimately lead to a debt-trap where new loans
have to be raised to pay back the interest and instalments of old loans. Such a situation
needs to be carefully avoided through suitable macroeconomic policies.

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6. Interest Rates and Monetary Policy
Monetary policy refers to the policy of the monetary authority (such as the Reserve Bank
of India) aims at regulating supply of money and interest rates with a view to influence
savings, investment and through them affecting levels of production, employment and
prices in an economy. Tight monetary policy and high rates to interest in expanding their
business. This reduces overall level of spending (since the investment component of
expenditure becomes low) and reduces demand that can curb inflationary pressures. On
the other hand, reduction in interest rates can make investment more profitable by
reducing the cost of borrowings. This can set in expansionary forces at work, i.e., more
investment, larger spending, more demand and the consequent greater output and
possibly lower prices.
7. Conclusion
The macroeconomic issues discussed above can be broadly categorized into two types,
viz., (i) those that really matter for their own sake such as economic growth and better
living standards, economic stability and eradication of business cycles, control of inflation
and price stability, unemployment removal, etc. These are such outcomes that the
nation aims at and therefore they are known as Targets of policy. And then (ii) there
are issues like fiscal policies, i.e., governments expenditure, taxes, budgetary deficits,
public borrowings, etc., and monetary policies, i.e., money supply, rate of interest, etc.
These issues or policies are not needed for their own sake. They are in fact the Policy
Instruments that are used to achieve the targets or issues comprising the first category.
These instruments are in fact the variables that the government can change to achieve
the targets. Thus, as observed by Lipsey and Chrystal,
The macroeconomic policy problem is to choose appropriate values of the policy
instruments in order to achieve the best possible combination of outcomes of the
targets.1
Now the question arises, which of these two approaches, micro and macro, would be
best suited for a scientific understanding of the economic situation. It appears that these
two are competitive approaches and we have to select either one of them to analyze a
problem. In fact, they are not so competitive, they are interdependent, and neither
approach is complete without the other. Macroeconomic theory has its foundation in
microeconomic theory and likewise microeconomic theory has its foundation in
macroeconomic theory. Thus, strictly speaking there is only one economics, and the
micro and macro approaches are both complementary and mutually helpful to analyze
the problems of an economy. To illustrate this point, we take the overall objective of
economic policy which is to maximize economic welfare of the people in a country.
Macroeconomics tells us that the economy will be close to welfare maximization if it
makes the full utilization of its total resources. But actual welfare does not depend only
makes the full utilization of its total resources. But actual welfare does not depend only
on the fuller of resources, it also depends upon how resources are allocated among
different lines of production. If we ignore resource allocation pattern, the welfare may
not be maximized as misallocation of resources (deviation from optimum allocation of
resources) would mean economy may be producing more of those goods which are not
needed much while the goods needed most may be less produced inspite of overall fuller
utilization of resources. Thus, macro approach has to be supplemented by the
microeconomic theory which deals with the resource allocation among different uses and

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lays down rules for the optimum allocation for welfare maximization, the welfare target
cannot be achieved unless resources are being fully utilized at the macro level. Thus, the
basic goal of economics. This goal can be obtained only when we have fuller utilization of
resources as laid down by macroeconomic analysis. Thus, to understand the functioning
of an economy and for effective implementation of economic policies, we must integrate
these two approaches in a judicious manner.

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