So what is Macro-Economics? Is it just the part of economics that deals with GDP, Inflation and employment rate of the nation? or its more than that?? Let me explain you with an example.....
Consider all the FISHES in the LAKE as BUSINESS FIRMS! and LAKE as ECONOMY in itself. If you have CLEAN LAKE, more fishes will flourish! In the similar manner, if the economy is good, Business firms produces more goods, more jobs and more growth (GDP increases, Less Unemployment and Inflation Increase). If the LAKE is dirty and toxic, fishes will perish, like business perish in bad economy time (GDP decrease, Unemployment increases and Inflation Decreases)! . If you consider more LAKES then it will be a GLOBAL ECONOMY.
In normal notion its been said that INFLATION is EVIL (as it reduces the value of your money). But this is a needed DEVIL, when there is growth there has to be an inflation. Something similar as part of the same coin. The challenge any government (FED in US) faces is to keep both in balance.( Inflation and Unemployment LOW and Growth HIGH)
Fiscal and Monetary are two policy that government/Fed uses to tweak our economy to keep Inflation and Unemployment under check.
Fiscal Policy= a. act of increasing/decreasing tax b. Government spending(Stimulus package).
Monetary Policy= Fed controls the supply of money in the economy . [Fed are independent, they are not answerable to government of their action]
Consider all the FISHES in the LAKE as BUSINESS FIRMS! and LAKE as ECONOMY in itself. If you have CLEAN LAKE, more fishes will flourish! In the similar manner, if the economy is good, Business firms produces more goods, more jobs and more growth (GDP increases, Less Unemployment and Inflation Increase). If the LAKE is dirty and toxic, fishes will perish, like business perish in bad economy time (GDP decrease, Unemployment increases and Inflation Decreases)! . If you consider more LAKES then it will be a GLOBAL ECONOMY.
In normal notion its been said that INFLATION is EVIL (as it reduces the value of your money). But this is a needed DEVIL, when there is growth there has to be an inflation. Something similar as part of the same coin. The challenge any government (FED in US) faces is to keep both in balance.( Inflation and Unemployment LOW and Growth HIGH)
Fiscal and Monetary are two policy that government/Fed uses to tweak our economy to keep Inflation and Unemployment under check.
Fiscal Policy= a. act of increasing/decreasing tax b. Government spending(Stimulus package).
Monetary Policy= Fed controls the supply of money in the economy . [Fed are independent, they are not answerable to government of their action]
(Above figure is used to derive "MAGIC EQUATION" in economics, but I have taken a liberty to tweak it, so layman reader can understand it too)
EXAMPLE: with movement of iPhone (cause mostly everybody loves iPhone).
Step 1: You have to work in BUSINESS FIRM to earn INCOME .
Step 2: You go-to market and buy iPhone for $599 (money goes to) Business Firm(Apple).
Step 3: You go-to BANK and SAVE the the rest . [You can take loan too]
Step 4: You pay your taxes to the Government. [Business firms too]
Step 5: Government gives you back TAX return (remember fiscal policy ??)
Step 6: Bank invests the money you deposit in the Business firms.
Step 7: Government uses services from Business firms (eg. to build a satellite/road/Airforce One)
Step 8: "Government Deficit: Government Spending is more than TAX collected, so to balance the difference it needs to take loan, so how they do it?US treasury issues T-Bills, bonds and securities in exchange of MONEY(and pays back with Interests).
If you are curious S+T≡G+I+NX is the "Magic Equation", to explain this is beyond my scope (at least in this blog, may be in later blog i'll try to explain)
≡ means True by definition.
S= Savings (Private)
T= Tax
G= Government Spending
I= Domestic Investment
NX= Net Import/Export
T-G= Negative (Deficit)/ T-G= Positive (Surplus)
In next blog i'll explain......Financial Meltdown of 2008 and what will happen if:
a. Government increase or decreases TAX.
b. Government increases or decreases Spending.
EXAMPLE: with movement of iPhone (cause mostly everybody loves iPhone).
Step 1: You have to work in BUSINESS FIRM to earn INCOME .
Step 2: You go-to market and buy iPhone for $599 (money goes to) Business Firm(Apple).
Step 3: You go-to BANK and SAVE the the rest . [You can take loan too]
Step 4: You pay your taxes to the Government. [Business firms too]
Step 5: Government gives you back TAX return (remember fiscal policy ??)
Step 6: Bank invests the money you deposit in the Business firms.
Step 7: Government uses services from Business firms (eg. to build a satellite/road/Airforce One)
Step 8: "Government Deficit: Government Spending is more than TAX collected, so to balance the difference it needs to take loan, so how they do it?US treasury issues T-Bills, bonds and securities in exchange of MONEY(and pays back with Interests).
If you are curious S+T≡G+I+NX is the "Magic Equation", to explain this is beyond my scope (at least in this blog, may be in later blog i'll try to explain)
≡ means True by definition.
S= Savings (Private)
T= Tax
G= Government Spending
I= Domestic Investment
NX= Net Import/Export
T-G= Negative (Deficit)/ T-G= Positive (Surplus)
In next blog i'll explain......Financial Meltdown of 2008 and what will happen if:
a. Government increase or decreases TAX.
b. Government increases or decreases Spending.
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