1. Introduction
As the economic environment and situation is rapidly changing, the related strategies must make quick adjustment for meeting the demand of the macro-economy and therefore to ensure the whole country’s development. China’s Central Economic Work Conference, the highest level conference which gives the direction of the economic development in a short run , will regularly be convened once a year, usually at December, to define the macroeconomic policies of next year according to the judgment of the current economic situation. The Conference of 2012 suggests the five aspects and tasks of the condition we need to improve. The five aspects are as follows:
1, continue to strengthen and improve the Macro-regulation, and promoting steady and robust economic development
2, solving the three problems about countryside,agriculture and farmers unremittingly 3, speed up the adjustment of economic structure
4, promote reform in major areas and key links
5, ensuring and improving people’s livelihood
The Macro-regulation contains numerous main integrated instruments of correcting the economic trend to make sure that it will be on the right track as plan. The macro-economy will take the responsibility of economic growth and the improvement of the nation, so the Macro-regulation is extremely essential to the overall economic operation and gives the guidance to every field related to the economy. The government will put the macro-economy and Macro-regulation in the first place even though there are many other items need to alter, so the interpretation of macro-economy policies highly deserves our attention.
The history of market economy has proved that it can optimize the allocation of resources, but the market system has some intrinsic weaknesses. For making up those weaknesses, we need Macro-regulation to save the cost of market adjustment, avoid market failure, and repair the incompleteness (Zhang Kui, 2010). And the Macro-control, through fiscal and monetary policy , will be used mainly to focus on the solution of employment improvement, economic growth, price level stability, and
equilibrium of balance of payments.
2. Fiscal Policy
From the perspective of economics, the instruments of Macro-control mainly consist of monetary policy and fiscal policy . Based on the Central Economic Work Conference report, the central government decides to pursue the proactive fiscal policy and prudent monetary policy.
The fiscal policy means the government will mainly adjust tax rate and government expenditures to affect the whole country ’s employment and national income. A proactive fiscal policy is the government wants to stimulate the economic growth through increasing the deficit and expanding the expenditures (Cong Ming, 2002).
2.1 Tax
The tax policy will decide how much money that all the parties participating in the economic life will have to pay obligatorily. By adjusting the tax rate, the government can increase or decrease the income and the expenses of a certain group of people.
Under the circumstance that the whole economy is suffering from the overheating, and the government will raise the tax rate, so that people will have to pay more extra money to the government, therefore the money they can spend will go down, and the social aggregate demand will be impeded and chill the overheated economy down. And if the government thinks the economy is shrinking or recessing, it will cut tax rate to promote the consumption. The main purpose of cutting tax is to encourage the investment and lower the enterprises’ cost (Xiong Lu, 2009).
Lower tax rate usually means that the enterprises or consumers will have more money in their pockets. So enterprises will put that money in the investment or hiring more labor forces, which means a higher employment rate. And consumers will purchase more products so that the producers or enterprises will benefit from that, which also means more profits and high employment.
2.2 Government Expenditures
Another instrument that government can use to change the fiscal policy is the government expenditures. Government can expand their expenditures by purchasing more products and services which are provided by the markets. If the government wants to provoke the market demand, it will pursue a proactive fiscal policy which can increase the aggregate demand. Otherwise, it will pursue a restrictive fiscal policy .
2.3 Unemployment
No matter what kind of policy that government will have, one of its main purposes are improving the employment. Jia Kang and Liu Wei (2009) believed that the fiscal policy could alleviate the unemployment problems. As the employment rate is difficult to be measured, economists will usually use unemployment rate to show the employment condition. A person is considered unemployed if he or she is on temporary layoff, is looking for a job, or is waiting for the start date of a new job. The people laid-off plus the people who are working are the total labor force.
The unemployment rate is the number of people unemployed divided by the number of labor force.
Number unemployed Unemployme nt rate =Labor force 100
Source: National Bureau of Statistics of China
The graph shows that from 2009, the unemployment rate has decreased after reaching the peak at 4.3%. Even though the unemployment rate in 2011 did not rise, the number of laid-off was actually increasing to 9.22 million. And every year, the labor force will newly increase ten million because of the population growth (Lu Liang, 2002).
In the Central Economic Work Conference report, the China ’s central government will pursue a proactive fiscal policy . It means that it will increase the expenditures and cut tax which is also mentioned in the report.
Through the proactive fiscal policy, enterprises will need to pay less tax and have more money left for investing or other purposes, which means there will be more jobs created. Government will spend more money and purchase more products, so the market entities can gain more profits, which also will increase the number of employed.
3. Monetary Policy
Another critical method for government to Macro-control is the monetary policy. Monetary policy is all the measures that central bank use to control and adjust the supply of money to achieve the certain economic goal. The main purpose of monetary policy is to restrain the inflation (Hu Xiaolian, 2011). It includes the open-market operation, reserve system, discount rate and interest rate to change the supply of money .
3.1 Reserve System
Reserve system is a key tool to control the money supply. Reserve means when the banks absorb the deposits, the money they have to save in the central bank and cannot use to lend. If the reserve rate is higher, it means bank will have to save more money and have less money to lend. Consequently, there will be less money supply.
Through the money multiplier effect, a little change in the reserve ratio will
cause a great difference in the money supply. Money multiplier effect means financial institutions can create much more money than the originally supplied money . For example, if the reserve ratio is 20%, when someone put one hundred yuan in bank, the bank can use eighty yuan to lend. Another person who gains those eighty yuan will put it in bank. And bank can use sixty-four yuan to lend. Finally, the money in the market will be five hundred yuan . So the reserve system can enormously influence the ultimate money supply.
3.2 Interest Rate
Government can also use interest rate to change the money supply . Higher interest rate means higher cost of looking for loans for the enterprises, and people will be attracted to save more money in the banks. Therefore, less money will be circulating in the market.
All those monetary policies are used ultimately for the stabilization of the value of the currency (Liu Gengye, 2008). The value of the currency can decide the price level and be decided by the money supply. When there are more money circulation than they are originally needed, the value of money will go down. In that case, an inflation may occur.
3.3 Inflation
Inflation means an increase of overall level of price. A important concept to describe inflation is the Consumer Price Index which is known as CPI. It is a measure of overall cost of the goods and service bought by a typical consumer. CPI can be calculated as the updated cost divided by the based period cost.
CPI can be used to show the inflation rate. The inflation rate can be defined as the percentage rate of change of a price index over time.
Generally, the value of money and the price level are inversely related. With a fixed demand of money , if the money supply decreases, the value of money will ascend, and the price level will decrease. If money will be supplied more, it will be
devalued, while the price level will rise. The relationship can be illustrated as follow.
As the money supplied usually is defined by the government and is a constant figure, so it will be shown as a straight line. When money supplied increases, the line MS1 moves to right at MS2. The equilibrium point will move from A to B, the value of money will decrease from 1/2 to 1/4, meanwhile the price level will rise from two to four.
In the Central Economic Work Conference report, central bank will have a prudent monetary policy. A prudent monetary policy means the government wants to restrict the supply of money . It will increase the reserve ratio and the interest rate to prevent too much money being used in the market.
Source: National Bureau of Statistics of China
From the chart above, we can see that while the inflation rate is increasing, the reserve ratio will also increase, and so does the interest rate. When the inflation rate is relatively stable, the reserve ratio and interest rate will also stable accordingly.
Source: National Bureau of Statistics of China
The graph above suggests the inflation rate change from year 2007 to 2011. When the inflation rate is between 1% and 3%, it is known as crawling inflation and considered good to the economy . When the inflation rate is between 3% and 6%, it will become moderate inflation and is negative to the proper economic development. From the graph we can see the inflation surges to 5.4% in 2011 after the lowest value of -0.7% in 2009. It has almost reached the 6% and very close to the moderate inflation which will be dangerous for the nation.
So the government will want to begin a prudent monetary policy to restrain the
inflation. It means the government will raise the interest rate and the reserve ratio for lowering the inflation rate.
4. Combination of Fiscal Policy and Monetary Policy
The Macro-control is used to achieve the goal of increasing the employment and decreasing the inflation rate. But the employment and inflation will meet conflict when the government uses the macro-regulation to obtain the goal. In a short run, the unemployment and inflation have a trade-off relationship. Companied with employment growth, the inflation rate will also increase. Because when government wants to improve the employment, it will lower the tax rate and expand government expenditures, which means more money will be supplied to the market. However, more money supply will have the potentiality to cause the inflation.
The Philips Curve shows the inverse relationship between unemployment and inflation.
The relationship between inflation and unemployment has to move along the curve, which means if one party goes up, the other one will have to go down. And the ratio between them must be maintained in a reasonable section.
So the government will usually use both fiscal policy and monetary policy to keep the inflation and unemployment in balance. The Central Economic
Work
Conference has already decided to pursue a proactive fiscal policy and a prudent monetary policy.
On one hand, the proactive policy will cut tax and expand government purchasing to ensure the employment progress. On the other hand, the prudent monetary policy can raise the interest rate and reserve ratio to absorb the adequate money caused by the proactive fiscal policy and relief the inflationary pressure.
5. Conclusion
The macro-economy can be guided through the fiscal policy and monetary policy. Fiscal policy means the tax and government expenditures to adjust the aggregate demand. Monetary policy will use the interest rate and reserve system to control the money supply . There are some intrinsic conflicts among the different goals of macro-regulation. The government will choose the different configuration of fiscal policy and monetary policy to achieve the goals of macro-regulation.
References
[1] 张魁. 社会主义市场经济条件下宏观调控的必要性[J]. 财经界, 2010.
[2] 胡晓炼. 抑制通胀是稳健货币政策的首要任务[J]. 中国金融, 2011(9).
[3] 熊鹭. “结构性减税”对经济的影响[J]. 中国金融, 2009(14).
[4] 贾康, 刘薇. 积极财政政策的理论和实践[J]. 中共中央党校学报, 2009, 13(1).
[5] 丛明. 正确认识我国实施的积极财政政策和稳健货币政策[J]. 思想理论教育导刊, 2002(4).
[6] 刘庚业. 什么事狭义货币、广义货币和货币政策[J]. 中国工会财会, 2008.
[7] 王建国. 浅谈宏观调控的必要性[J]. 井冈山医专学报, 2003, 10(5).
[8] 卢亮. 1998-2002我国积极财政政策就业效应的实证分析[J]. 西北人口, 2005(1).
1. Introduction
As the economic environment and situation is rapidly changing, the related strategies must make quick adjustment for meeting the demand of the macro-economy and therefore to ensure the whole country’s development. China’s Central Economic Work Conference, the highest level conference which gives the direction of the economic development in a short run , will regularly be convened once a year, usually at December, to define the macroeconomic policies of next year according to the judgment of the current economic situation. The Conference of 2012 suggests the five aspects and tasks of the condition we need to improve. The five aspects are as follows:
1, continue to strengthen and improve the Macro-regulation, and promoting steady and robust economic development
2, solving the three problems about countryside,agriculture and farmers unremittingly 3, speed up the adjustment of economic structure
4, promote reform in major areas and key links
5, ensuring and improving people’s livelihood
The Macro-regulation contains numerous main integrated instruments of correcting the economic trend to make sure that it will be on the right track as plan. The macro-economy will take the responsibility of economic growth and the improvement of the nation, so the Macro-regulation is extremely essential to the overall economic operation and gives the guidance to every field related to the economy. The government will put the macro-economy and Macro-regulation in the first place even though there are many other items need to alter, so the interpretation of macro-economy policies highly deserves our attention.
The history of market economy has proved that it can optimize the allocation of resources, but the market system has some intrinsic weaknesses. For making up those weaknesses, we need Macro-regulation to save the cost of market adjustment, avoid market failure, and repair the incompleteness (Zhang Kui, 2010). And the Macro-control, through fiscal and monetary policy , will be used mainly to focus on the solution of employment improvement, economic growth, price level stability, and
equilibrium of balance of payments.
2. Fiscal Policy
From the perspective of economics, the instruments of Macro-control mainly consist of monetary policy and fiscal policy . Based on the Central Economic Work Conference report, the central government decides to pursue the proactive fiscal policy and prudent monetary policy.
The fiscal policy means the government will mainly adjust tax rate and government expenditures to affect the whole country ’s employment and national income. A proactive fiscal policy is the government wants to stimulate the economic growth through increasing the deficit and expanding the expenditures (Cong Ming, 2002).
2.1 Tax
The tax policy will decide how much money that all the parties participating in the economic life will have to pay obligatorily. By adjusting the tax rate, the government can increase or decrease the income and the expenses of a certain group of people.
Under the circumstance that the whole economy is suffering from the overheating, and the government will raise the tax rate, so that people will have to pay more extra money to the government, therefore the money they can spend will go down, and the social aggregate demand will be impeded and chill the overheated economy down. And if the government thinks the economy is shrinking or recessing, it will cut tax rate to promote the consumption. The main purpose of cutting tax is to encourage the investment and lower the enterprises’ cost (Xiong Lu, 2009).
Lower tax rate usually means that the enterprises or consumers will have more money in their pockets. So enterprises will put that money in the investment or hiring more labor forces, which means a higher employment rate. And consumers will purchase more products so that the producers or enterprises will benefit from that, which also means more profits and high employment.
2.2 Government Expenditures
Another instrument that government can use to change the fiscal policy is the government expenditures. Government can expand their expenditures by purchasing more products and services which are provided by the markets. If the government wants to provoke the market demand, it will pursue a proactive fiscal policy which can increase the aggregate demand. Otherwise, it will pursue a restrictive fiscal policy .
2.3 Unemployment
No matter what kind of policy that government will have, one of its main purposes are improving the employment. Jia Kang and Liu Wei (2009) believed that the fiscal policy could alleviate the unemployment problems. As the employment rate is difficult to be measured, economists will usually use unemployment rate to show the employment condition. A person is considered unemployed if he or she is on temporary layoff, is looking for a job, or is waiting for the start date of a new job. The people laid-off plus the people who are working are the total labor force.
The unemployment rate is the number of people unemployed divided by the number of labor force.
Number unemployed Unemployme nt rate =Labor force 100
Source: National Bureau of Statistics of China
The graph shows that from 2009, the unemployment rate has decreased after reaching the peak at 4.3%. Even though the unemployment rate in 2011 did not rise, the number of laid-off was actually increasing to 9.22 million. And every year, the labor force will newly increase ten million because of the population growth (Lu Liang, 2002).
In the Central Economic Work Conference report, the China ’s central government will pursue a proactive fiscal policy . It means that it will increase the expenditures and cut tax which is also mentioned in the report.
Through the proactive fiscal policy, enterprises will need to pay less tax and have more money left for investing or other purposes, which means there will be more jobs created. Government will spend more money and purchase more products, so the market entities can gain more profits, which also will increase the number of employed.
3. Monetary Policy
Another critical method for government to Macro-control is the monetary policy. Monetary policy is all the measures that central bank use to control and adjust the supply of money to achieve the certain economic goal. The main purpose of monetary policy is to restrain the inflation (Hu Xiaolian, 2011). It includes the open-market operation, reserve system, discount rate and interest rate to change the supply of money .
3.1 Reserve System
Reserve system is a key tool to control the money supply. Reserve means when the banks absorb the deposits, the money they have to save in the central bank and cannot use to lend. If the reserve rate is higher, it means bank will have to save more money and have less money to lend. Consequently, there will be less money supply.
Through the money multiplier effect, a little change in the reserve ratio will
cause a great difference in the money supply. Money multiplier effect means financial institutions can create much more money than the originally supplied money . For example, if the reserve ratio is 20%, when someone put one hundred yuan in bank, the bank can use eighty yuan to lend. Another person who gains those eighty yuan will put it in bank. And bank can use sixty-four yuan to lend. Finally, the money in the market will be five hundred yuan . So the reserve system can enormously influence the ultimate money supply.
3.2 Interest Rate
Government can also use interest rate to change the money supply . Higher interest rate means higher cost of looking for loans for the enterprises, and people will be attracted to save more money in the banks. Therefore, less money will be circulating in the market.
All those monetary policies are used ultimately for the stabilization of the value of the currency (Liu Gengye, 2008). The value of the currency can decide the price level and be decided by the money supply. When there are more money circulation than they are originally needed, the value of money will go down. In that case, an inflation may occur.
3.3 Inflation
Inflation means an increase of overall level of price. A important concept to describe inflation is the Consumer Price Index which is known as CPI. It is a measure of overall cost of the goods and service bought by a typical consumer. CPI can be calculated as the updated cost divided by the based period cost.
CPI can be used to show the inflation rate. The inflation rate can be defined as the percentage rate of change of a price index over time.
Generally, the value of money and the price level are inversely related. With a fixed demand of money , if the money supply decreases, the value of money will ascend, and the price level will decrease. If money will be supplied more, it will be
devalued, while the price level will rise. The relationship can be illustrated as follow.
As the money supplied usually is defined by the government and is a constant figure, so it will be shown as a straight line. When money supplied increases, the line MS1 moves to right at MS2. The equilibrium point will move from A to B, the value of money will decrease from 1/2 to 1/4, meanwhile the price level will rise from two to four.
In the Central Economic Work Conference report, central bank will have a prudent monetary policy. A prudent monetary policy means the government wants to restrict the supply of money . It will increase the reserve ratio and the interest rate to prevent too much money being used in the market.
Source: National Bureau of Statistics of China
From the chart above, we can see that while the inflation rate is increasing, the reserve ratio will also increase, and so does the interest rate. When the inflation rate is relatively stable, the reserve ratio and interest rate will also stable accordingly.
Source: National Bureau of Statistics of China
The graph above suggests the inflation rate change from year 2007 to 2011. When the inflation rate is between 1% and 3%, it is known as crawling inflation and considered good to the economy . When the inflation rate is between 3% and 6%, it will become moderate inflation and is negative to the proper economic development. From the graph we can see the inflation surges to 5.4% in 2011 after the lowest value of -0.7% in 2009. It has almost reached the 6% and very close to the moderate inflation which will be dangerous for the nation.
So the government will want to begin a prudent monetary policy to restrain the
inflation. It means the government will raise the interest rate and the reserve ratio for lowering the inflation rate.
4. Combination of Fiscal Policy and Monetary Policy
The Macro-control is used to achieve the goal of increasing the employment and decreasing the inflation rate. But the employment and inflation will meet conflict when the government uses the macro-regulation to obtain the goal. In a short run, the unemployment and inflation have a trade-off relationship. Companied with employment growth, the inflation rate will also increase. Because when government wants to improve the employment, it will lower the tax rate and expand government expenditures, which means more money will be supplied to the market. However, more money supply will have the potentiality to cause the inflation.
The Philips Curve shows the inverse relationship between unemployment and inflation.
The relationship between inflation and unemployment has to move along the curve, which means if one party goes up, the other one will have to go down. And the ratio between them must be maintained in a reasonable section.
So the government will usually use both fiscal policy and monetary policy to keep the inflation and unemployment in balance. The Central Economic
Work
Conference has already decided to pursue a proactive fiscal policy and a prudent monetary policy.
On one hand, the proactive policy will cut tax and expand government purchasing to ensure the employment progress. On the other hand, the prudent monetary policy can raise the interest rate and reserve ratio to absorb the adequate money caused by the proactive fiscal policy and relief the inflationary pressure.
5. Conclusion
The macro-economy can be guided through the fiscal policy and monetary policy. Fiscal policy means the tax and government expenditures to adjust the aggregate demand. Monetary policy will use the interest rate and reserve system to control the money supply . There are some intrinsic conflicts among the different goals of macro-regulation. The government will choose the different configuration of fiscal policy and monetary policy to achieve the goals of macro-regulation.
References
[1] 张魁. 社会主义市场经济条件下宏观调控的必要性[J]. 财经界, 2010.
[2] 胡晓炼. 抑制通胀是稳健货币政策的首要任务[J]. 中国金融, 2011(9).
[3] 熊鹭. “结构性减税”对经济的影响[J]. 中国金融, 2009(14).
[4] 贾康, 刘薇. 积极财政政策的理论和实践[J]. 中共中央党校学报, 2009, 13(1).
[5] 丛明. 正确认识我国实施的积极财政政策和稳健货币政策[J]. 思想理论教育导刊, 2002(4).
[6] 刘庚业. 什么事狭义货币、广义货币和货币政策[J]. 中国工会财会, 2008.
[7] 王建国. 浅谈宏观调控的必要性[J]. 井冈山医专学报, 2003, 10(5).
[8] 卢亮. 1998-2002我国积极财政政策就业效应的实证分析[J]. 西北人口, 2005(1).