Macroeconomics provides us with a overall checkup of a country’s economic health. Instead of looking at the behavior of individual businesses and consumers, which is called microeconomics, the goal of macroeconomics is to look at overall economic trends such as employment levels, productivity, and inflation.
A country’s economy is controlled by its money supply and each country’s monetary policy is the responsibility of its central bank. The Bank of England (BoE), the European Central Bank (ECB), and the Bank of Japan (BoJ) all regulate their money supply with the same basic goal as the U.S. Federal Reserve (Fed). That goal is to promote economic growth while keeping inflation in check.
Just as a driver steps on an accelerator to speed up or on the brake to slow down a vehicle, central banks control their economy by increasing or decreasing their money supply.
Monetary policy is like a guessing game. There’s no one single indicator that tells us how fast an economy is growing or if that growth will lead to inflation. There’s also no way of knowing how quickly an economy will respond to political or fiscal changes that may take months or years to implement. Consumers usually don’t rush out to buy new houses as soon as central banks lowers interest rates (although it sure seemed like it in the US during the past couple years). Nor do consumers automatically stop using their credit cards when their central bank raises interest rates.
Central banks are blessed with the gift of foresight which is how they manage economic growth. Okay not really. They actually keep tabs on their economy by keeping one eye on inflation, which is the product of an overheating economy, and the other eye on unemployment, which is the product of a slowing economy.
Government spending, taxation, and borrowing, which is called fiscal policy, also affects the economy. But not as much as monetary policy. However, just as a family’s economic health is determined by the parent’s income and spending behavior, a nation’s economic health is heavily determined by fiscal policy.