Macroeconomic and Microeconomic policy tools to stabize the Market economy in the Shoert and in Long-term

Main policies available for economic management

Government Policy Mix

Internal balance: govt. uses monetary policy supplemented by fiscal policy

External balance: no longer a policy objective of Howard govt.

Strong economic growth: govt. has been using microeconomic policy

Macroeconomic policy

There are now only 2 instruments (arms) of Macroeconomic management which tend to influence AD

Monetary and Fiscal policy

Impact overall level economic activity

Main role is to manage business cycle i.e. minimize fluctuations in the business cycle by influence AD

Stabilize EG by smoothing peaks and troughs in economic cycle

Also referred to as counter-cyclical policies

Not enough to deal with complex policy goals

Good in short term to stimulate or contract economic activity

Less effective long term problems like

• Lack of international competitiveness
• High foreign debt
• Low level national savings

Microeconomic policy

• Specific measures to improve operations of firms, industries and markets.
• Aim to promote structural change by influencing supply side of economy
• Improves resource allocation, maximize output scarce resources
• By improving productivity, competitiveness and efficiency it is believed it will raise OZ sustainable rate of growth over time
• Central to addressing long term aim of potential constraints on growth such as CAD and inflation
• Overall aim is to encourage efficient operations of markets to lift productivity and encourage producers to take on ‘world best’ practices

In practice the effectiveness of these policies is dependent on how the economic variables work and its side effects and the workings of the price mechanisms and social factors and labor market imperfections in particular.As well, the effectiveness also differens in different economi conditions and the expectation formation in an economy. It also depends on the time-lag  of policies to make an impact on economic activity and price levels and the flexibility of the market and structuaral issues.