Critically Examine the Effectiveness of Various Approaches That May Be Used to Reduce Macroeconomic Instability.

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1. Critically examine the effectiveness of various approaches that may be used to reduce macroeconomic instability.

According to Mc Vaish (Macroeconomics theory, p123) Macroeconomics can be defined as the analysis of the economy wide aggregates such as the analysis of the total output and employment, total consumption, total investment, total saving and national product. Macroeconomic theory employs technique of general equilibrium in order to study the determination of the general price level, money supply, total employment and output levels and fluctuations in these aggregates magnitudes.
A macroeconomic stable environment can be defined as one in which inflation is low and predictable, the exchange rate is near its equilibrium level, the government budget is well managed, the budget deficit relative to GDP is at a reasonable level and the use of central bank credit to finance the budget deficit is kept at a minimal level. Macroeconomic stability sends important signals to the private sector about the direction of economic policies and the credibility of authorities’ commitment to manage the economy efficiently. Such stability, by facilitating long term planning and investment decisions, encourages savings and capital accumulation by the private sector. Macroeconomic instability takes place in two forms namely exogenous shocks and inappropriate policies. Exogenous shocks (such as reversal capital flows, terms of trade and natural disasters) require compensatory action and can rug the economy into disequilibrium. On the other hand inappropriate policies such as the monetary and fiscal policy have a direct impact on the macroeconomic stability of a country.
According to (AmosWeb, 2012), governments pursue three major macroeconomics goals namely economic growth, low unemployment and low inflation rates. Economic growth can be defined as the yearly change in…...

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