Basic concepts of macroeconomics: Policy tools

Left ArrowBasic concepts of macroeconomics: Interest rate Purple Dot Government taxation and spendingRight Arrow


Annexe I: Basic concepts of macroeconomics

At the national level

Policy tools

Governments have two major policy tools that they can use to intervene, manage, or stabilise the economy in times of crisis or fluctuation.

1. Fiscal policy

Governments can increase or decrease government spending and taxes, depending on the state of the economy. This is called ‘fiscal policy’. For example, if the government wants to stimulate the economy during a period of recession, it can increase government spending and/or bring tax cuts so that people have more money to spend in the market. Increasing demand through government spending, tax cuts, or a combination of the two can trigger production and employment in a positive way.

2. Monetary policy

In order to affect the direction of the economy, central banks can implement monetary policies by making changes in interest rates and money supplies. For example, if the inflation rate is higher than the desired levels, the central bank can increase the interest rate. This makes it effectively more expensive to borrow money. Higher interest rates would also reduce consumer spending, thus lowering the demand and inflation.

Another monetary policy measure implemented by central banks is increasing the liquidity in the economy (i.e. printing more money or turning some of their assets to cash).1The Central Banks section of the starter kit also provides more information on monetary policies. Due to the COVID-19 pandemic, this has been one of the measures through which many economies tried to deal with the economic slowdown and increased financial need for health and other services. But without an intersectional analysis of the impacts of these policies on the lives of women, girls, and non-binary people, these measures may end up widening the disparities between different groups within the society.2For a review of the monetary measures employed by some central banks during the COVID-19 pandemic, see Lu, M. (20 May 2020). How Central Banks are Responding to COVID-19, in One Chart. Visual Capitalist.

“In effect, [alternative definitions of fiscal space] understand the appropriate role of the economy as working for society, rather than vice versa.”

– Diane Perrons, Gendering the Inequality Debate

Left ArrowBasic concepts of macroeconomics: Interest rate Purple Dot Government taxation and spendingRight Arrow





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