What Macroeconomic Problems Do Policy Makers Most Commonly Face?

Macroeconomics addresses large-scale economic factors that affect the overall population. Policymakers, therefore, have to make macroeconomic decisions such as setting interest rates and balancing a country's inflation with both its trade and the foreign exchange rate. Establishing financial conditions that facilitate an increase in private sector investment also helps policymakers to increase economic growth while reducing poverty. Policymakers have to take numerous factors into account when tackling wide problems such as unemployment, inflation, and a country's current gross domestic product (GDP).

Philosophies on how to accomplish growth and a healthy economy vary. Keynesian economic policies recommend that a government run a budget surplus during times of financial prosperity and a deficit during a recession. Classical economic policies take a more hands-off approach during a recession, believing that the markets correct themselves when left unimpeded and that excessive government borrowing or intervention negatively affects the market potential for recovery. Policymakers, therefore, have to reach some agreement or settlement with one another on what approaches to take at any given time.

The use of taxation as a macroeconomic tool is a hotly debated topic amongst policymakers since tax rates have a large effect on overall financial conditions and the government's ability to balance a budget. Supply-side economic theories, essentially the opposite of Keynesian theories, argue that higher taxes pose a barrier to private investment, and therefore hinder the growth that is essential to a healthy economy. However, lower taxes mean that the government has less money to spend, which potentially increases the deficit due to more government borrowing.

This was seen during the early 1980s when Ronald Reagan cut taxes and increased military spending as a means of stimulating the economy. As a result, the government was required to run a deficit to accommodate the increased spending with less revenue.

Policymakers always want to avoid a depression, which occurs when there has been an extremely severe recession. A depression typically brings with it increased unemployment, increased poverty, reduced credit, a shrinking GDP, and overall economic volatility. Reduced investor confidence makes it increasingly difficult to get capital back into the economy to restimulate growth. Policy changes are often needed in this instance to stabilize the economy and reverse the effects of the prolonged recession.

A famous example is the Great Depression of 1929 in the United States. As a result of the stock market crash and the resulting fallout, Franklin D. Roosevelt and other policymakers created the Federal Deposit Insurance Corporation (FDIC) and the Securities and Exchange Commission (SEC) to protect banking deposits and regulate stock market trading.  Government spending also increased as World War II began, and these changing conditions helped reverse the depression economics of the previous years.

Policymakers have a difficult job when it comes to macroeconomics. Economic factors are interrelated in so many ways that a change in one factor can have unintended consequences on multiple others. Policymakers, therefore, have to maintain a fairly delicate balancing act while trying to tip the scales toward economic growth in ways that do not increase overall economic volatility.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Office of Management and Budget. "Historical Tables: Budget of the U.S. Government, Fiscal Year 2010," Page 5. Accessed Oct. 20, 2020.

  2. Federal Deposit Insurance Corporation. "History of the FDIC." Accessed Oct. 20, 2020.

  3. Securities and Exchange Commission Historical Society. "Timeline." Accessed Oct. 20, 2020.

  4. Office of Management and Budget. "Historical Tables: Budget of the U.S. Government, Fiscal Year 2010," Page 7. Accessed Oct. 20, 2020.

Take the Next Step to Invest
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Service
Name
Description