What can a country do to overcome the macroeconomic problems it faces?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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The answer to this depends on what problems the country is facing.  In general, countries can face two types of problems.  They can have too much inflation or too much unemployment.

If a country has too much inflation, it needs to reduce its people's ability to spend.  This "slows down" the economy and makes prices go down.  The country can do this by fiscal policy (raising taxes, reducing government spending) and/or by monetary policy (raising interest rates, selling government bonds).

If the country has too much unemployment, it needs to increase its people's ability to spend.  Again, it can do this through fiscal policy (lower taxes, spend more) and/or by monetary policy (lower interest rates, buy government bonds).

That said, some economists believe that what a country should do to improve its economy is to lower taxes and decrease the amount of government regulation of the economy.  These "classical economists" believe in laissez-faire.  They think the economy will always work itself out of any problems if the government just stays out of economics.

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