Question

1. Fiscal Policy: Government can control the economy in a big way by adjusting its expenditure. The group of mechanisms using expenditure form the fiscal policy. When government spends more it can lead to more demand and that means more price increase. This means both high growth and high inflation. And it works in the reverse too. Thus, governments try to spend more during periods of low growth & low inflation and cut spending during periods of high growth & high inflation.
2. Interest Rates: When you loan money to somebody, you expect something extra in return. This excess is called the interest. Interest rate is a positive number that measures how much excess you will get. There are bunch of rates here. In the short term, this rate is usually set by the Central Banks. Right now it is close to zero. In the long term, this is set by the market and is dependent on inflation and the long term prospects of the economy. The mechanisms in which the central banks control the short term rates is called monetary policy. Explain how the two topics relate to macroeconomics.

Answer 1

These two topics make impact upon the economy as a whole and macroeconomics gives attention to the economic aggregates. So, it is said that fiscal policy and interest rates are related to the macroeconomics.

For example, fiscal policy involves increase in spending and it creates demand, then demand is in the form of aggregate demand that is a macroeconomic im nature. On a similar more, a lower interest rate, increases consumption and investment spending that is applied to whole economy while stimulating the demand. Hence, interest rate also work at macroeconomic level, so it is related to macroeconomics.