Instrumentos de recolección de datos

B) The Fiscal Policy Instruments.

A) The Monetary Policy Instruments.

There are basically two types of monetary instruments namely: Direct and Indirect

 Direct monetary policy instruments is characterized by the use of: Credit ceiling, sectoral credit allocation, administrative control of interest and exchange rates, Moral suasion, movements of governments account in and out of the DMBs, issuance of stabilization securities etc. while

 Indirect Monetary Policy Instruments are market-based instruments and therefore, require a well developed and functional financial market. These Instruments include Open Market Operations, Liquidity Ratios, Cash Reserve ratios, Discount window operations, Expanded Discount Window operations (EDW) –Dec 2008 – Jul. 2009, Minimum Rediscount Rate MRR- up to Dec. 2006, Monetary Policy Rate – Dec 2006 to date

B) The Fiscal Policy Instruments –

The budgetary tools are basically the fiscal instruments. As defined earlier budget is an annual financial statement of government expected revenue and proposed expenditures. Like monetary policy, fiscal policy could be expansionary or contractionary both are referred to as discretionary policy.

Taxation imposition and government spending are basically fiscal policy instruments. A reduction in tax couple with a ‗fat’ government spending imply an expansionary fiscal policy , the opposite is contractionary fiscal policy.

These policies are applicable to different macroeconomic situations.

Self Assessment Exercise:

i. Give a solution to inflation using both fiscal and monetary policy ii. Which of the tools you used above is most potent and why?

3.3 The Macroeconomics Policy Targets.

The policy targets are the specific values which a government attaches to its various objectives of macroeconomics policies. For instance, the government may have the following policy objectives: (1) to achieve full employment at the rate of 3 per cent unemployment; (2) to achieve price stability at annual inflation rate of 5 per cent per annum; and (3) to attain the growth rate of 5 per cent per annum for the economy. Thus the policy targets of the government are 3 per cent unemployment rate, 5 per cent inflation rate and 5 per cent growth rate per year.

On the other hand, policy instrument are those exogenous variables that can be directly influenced by the government. The government can influence macroeconomic policies by such instruments of monetary policies as bank rate, changes in reserve ratios, open market operations, selective credit controls, etc.

similarity; it can use such fiscal policy instruments as tax rates, budgetary policy, compensatory fiscal policy, etc.

Self Assessment Exercise

i. Explain in details the macroeconomic targets.

Table 6.2.1 Monetary Policy Strategy

Tools of the

CBN Operating Targets Intermediate Targets Goals

Open Market Operation

Reserve Aggregates (reserves, non borrowed reserves, monetary base, non borrowed based)

Monetary Aggregates (M1,M2,M3)

High employment Discount

policy

Interest rate (short- term such as federal funds rate)

Interest rate (short - and long term)

Price stability Reserve

Requirement

Financial market stability Economic growth

ii. Differentiate between macroeconomic policy targets and objectives 3.4 Conflict or Trade-Off in Policy Objectives

The five policy objectives discussed above are not always complementary to one another but rather, they conflict. If a government tries to fulfil one objective, some other moves away. It has to sacrifice one objective in order to attain the other. It is, therefore, not possible to fulfil all these policy objectives simultaneously. The different policy objectives are:

 Full Employment and Economic Growth

The majority of economic hold the view that there is no inherent conflict between full employment and economic growth. Full employment is consistent with 4 percent unemployment in the economy, so the relationship between full employment and growth. Period of high growth are associated with low level of unemployment and period of low growth with rising unemployment.

 Economic Growth and Price Stability

There is conflict between the goals of economic growth and prices stability.

The rise in prices is inherent in the growth process. The demand for goods and services rises as a result of steeping up of investment on a large scale and consequent increase in incomes, this leads to inflationary rise in prices especially when the level of full employment is reached. In the long run, where new resources are developed and growth leads to the production of more commodities, the inflationary rise in prices will be checked. But the rise in prise will be there with the growth of the economy and it will be moderate and gradual.

 Full Employment and Price Stability

One of the objectives of macroeconomics policy in the 1950s was to have full employment with price stability. But the studies of Philips, Samuelsson, Solow and others in the 1960s established a conflict between the two objectives. These finding are explained in term of Philip curve. They suggest that full employment can be attain by having more inflation and that price stability can be achieved by having unemployment to the extent of 5 to 6 per cent.

 Full Employment and Balance of Payment

There is a major policy conflict between full employment and balance of payment. Full employment is always related to balance of payment deficit. In fact, the problem is one of maintaining either internal balance or external balance. If there is a balance of payment deficit, then a policy of reducing expenditure will reduced import but it will lead to unemployment in the country. If the government raises aggregate expenditure in other to increase employment, it will increase the demand for imports thereby creating disequilibrium in the balance of payments. It is only when the government adopts expenditure –switching policies such as devaluation that this conflict can

 Price Stability and Balance of Payments.

There appears to be no conflict between the objectives of price stability and balance of payment in a country. Fiscal and monetary policies aim at controlling inflation to discourage imports and encourage exports and thus they help in attain balance of payment equilibrium. However, if the government tries to remove unemployment and allow some inflation within the economy, there will discourage exports and encourage imports, thereby leading to disequilibrium in the balance of payment. But this may not happen if prices also rise by the same rate in other countries of the world.

Self Assessment Exercise

i. Enumerate and explain macroeconomic policy objectives

ii. Why is achievement of price stability seldom lead to unemployment?

iii. Examine the relationship between price stability and balance of payment (BOP)

4.0 Conclusion

This unit explores the macroeconomics situation and reflect on the policy frame work, policy objectives, and targets and conclude that for macroeconomic stability, application of both fiscal and monetary policy is the panacea.

5.0 Summary

The unit survey macroeconomic environment which necessitates discussion on macroeconomics policy framework - policy objectives, instrument, targets and strategies. We equally examined the trade off that existed among macroeconomic policy objectives because achieving the five goals simultaneously is not economically possible considering the policy instruments at the disposal of economic manager. The students were made to know that policy is applied in an economic discretionally –having to do with the current situation which could be expansionary or contractionary.

6.0 Tutor-Marked Assignment

i) What are macroeconomic policy objectives?

ii) Discuss conflicts that exist among various macroeconomic objectives.

iii) Distinguish among macroeconomic policy objectives, instruments and targets iv) Write short note on the following;

a. Direct monetary policy instruments b. Indirect monetary policy instruments c. Contractionary fiscal policy

d. Contractionary monetary policy e. Expansionary policy

v) Proffer policy recommendation(s) for an economy with chronic inflation and adverse balance of payment problems.

7.0 References/Further Readings

Attah B.O, Bakare, T.A. & Daisi, O.R., (2011); Anatomy of Economics Principles, Q&A (Macroeconomics), Raamson Printing Press, Oke-Afa, Isolo, Lagos, Nigeria

Amacher, R and Ulbrich, H, (1986); Principles of Economics, South Western Publications Co. Cincinnafi, Oliso

Bakare –Aremu T.A, (2013); Fundamental of Economics Principles (Macroeconomics), Raamson Printing Press, Oke-Afa, Isolo, Lagos, Nigeria

Bakare I.A.O, Daisi, O.R., Jenrola, O.A., & Okunnu, M.A., (1999): Principles and Practice of Economics (Macro Approach), Raamson Printing Press, Mushin, Lagos, NigeriaDennis R. A. et-al; International Economics, Mcgraw Hill Irwin, 8^th edition.

Familoni K.A, (1990); Development in Macroeconomics Policy, Concept Publications, Lagos, Nigeria

Fashina E.O, (2000); Foundations of Economics Analysis (Macro Theories), F.E.F International Company, Ikeja, Lagos, Nigeria

Jhingan M.L, (2010); Macroeconomics Theory, 12^th edition, Vrinda Publications (P) Ltd. Delhi, India

Jhingan M.L, (2010); International Economics, Vrinda Publications (P) Ltd.

Delhi, India

Lipsey R.G, (1979); An Introduction to Positive Economics, Hayper & Raw, London

Umo J.U, (1986); Economics; An African Perspectives , Johnwest, Lagos Nigeria.

Gordon Robert J. (2009). Macroeconomics (Eleventh ed.). Boston: Pearson Addison Wesley. ISBN 9780321552075