This study tries to use a macro econometric model for policy analysis purpose of the SecondrnGrowth and Transformation Plan. First the macro-econometric model is developed for Ethiopianrneconomy based on aggregate supply and aggregate demand framework. The model is composedrnof total 65 equations, out of which 12 equations are estimated equations and the rest are eitherrnidentity or bridging equations. After the model is developed, how it performs with historical datarnis checked by performing dynamic simulations for the sample period 2000-2014 and it hasrnperformed well in tracing historical values. After the model performs well with historical data itrnis used to simulate for the two scenarios of the Second Growth and Transformation Plan: thernincrease in the government investment by 10 percent and an external shock which is an increasernin import price by 10 percent. When the government investment increases by 10 percent, it hasrnan increasing impact on the output of the economy. On the other hand, it creates an inflationaryrnpressure. This shows that it may have a macroeconomic instability problem. When the importrnprice increases by 10 percent, it has a negative impact on the output of the economy and alsornleads to an inflationary pressure. But the inflationary pressure that comes from the increase inrnthe public investment is higher and leads to more macroeconomic instability problem. To avoidrnor minimize the instability problems that arise from these policy shocks the government shouldrnbe cautious and take preventive actions accordingly. In general, the Second Growth andrnTransformation Plan has to be undertaken in a matter of which its effect on the economyâ€™srnstability is minimal and the government should follow different measures to avoid the worstrnscenario