macroeconomic policies
DESCRIPTION
Macroeconomic Policies. By Anto and david. Demand side policies. Include Fiscal P olicy Monetary Policy. Fiscal Policy. - PowerPoint PPT PresentationTRANSCRIPT
MACROECONOMIC
POLIC
IES
B Y AN T O A
N D DA V I D
DEMAND SIDE POLICIES
Include
Fiscal PolicyMonetary Policy
FISCAL POLICYFiscal Policy is defined as the set of a government’s policies
relating to its spending and taxation rates. Direct and Indirect Taxes can be raised or lowered to alter the amount of disposable income consumers have.
There are two kinds of Fiscal Policy, one is expansionary fiscal policy to increase aggregate demand and contractionary, fiscal policy to reduce aggregate demand.
EXPANSIONARY FISCAL POLICY
If a government would like to encourage greater consumption then it can lower income taxes to increase disposable income. This is likely to increase AD, if a government would like to encourage greater investment, then it can lower corporate taxes so that firms enjoy higher after-tax profits that can be used for investment. This is likely to increase AD.
CONTRACTIONARY FISCAL POLICY If a government wants to fix the inflationary problems then it will
decrease in government purchases, an increase in taxes, and/or a decrease in transfer payments are used to correct the inflationary problems of a business-cycle expansion. The goal of contractionary fiscal policy is to close an inflationary gap, restrain the economy, and decrease the inflation rate.
MONETARY POLICYMonetary policy is defined as the process by which the monetary
authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability.
Like Fiscal Policy there are also two types of Monetary Policy
EXPANSIONARY MONETARY POLICY
An expansionary policy increases the total supply of money in the economy and is traditionally used to combat unemployment in a recession by lowering interest rates. Lowered interest rates encourage the household and the firms to increase their consumption and investment respectively. This will shift the AD to the right and result in higher real output and more employment.
CONTRACTIONARY MONETARY POLICY
Contractionary policy decreases the total money supply and involves raising interest rates in order to combat inflation. The result will be that investment will fall, and consumption will fall. All of these changes will shift the AD to the left.
SUPPLY SIDE POLICIES
Interventionistvs
Market-Based
INTERVENTIONIST POLICYInterventionist Policy is defined as the government’s direct
intervention into the economy.There are many types of interventionist policy and we will explore them
one by one• Investment in human capital• Research and Development• Provision and Maintenance of Infrastructure• Direct Support for Business/Industrial Infrastructure
INVESTMENT IN HUMAN CAPITALEducation and better trained labor force is the main goal of
this policy.Education leads to higher quality citizens that can advance to higher
quality jobs and therefore increase the overall economy of the country.
Better trained labor increases the efficiency of the labor force, and increases potential output
RESEARCH AND DEVELOPMENT (R&D)Research and Development aims to improve methods of
production and consequently increase potential outputThe government may give tax incentives to initiate this policy. This is to
encourage the firms to start their own R&D.
The government may also choose to directly fund researches and development
PROVISION AND MAINTENANCE OF INFRASTRUCTUREProvision and maintenance of infrastructure allows economic
activity to take place efficiently.Infrastructure, such as: roads, airports, railways, and others, are
essential for economic activity to take place. In other words it is the basis of all other economic activities.
By maintaining the infrastructure, government can ensure further investment and steady growth in economy
DIRECT SUPPORT FOR BUSINESSESDirect support for businesses aims to advance certain
industries that the government find attractiveGovernment may directly support a business by improving competitive
nature/decreasing competition, supporting businesses in their access to markets abroad.
MARKET-BASED POLICIESMarket-based policy focuses on allowing the invisible hand of
the market to solve all the problems in the marketThere are numerous market-based policies, but we will group them into
the following groups• Reduction in taxes• Labor market reform• Weakening government control
REDUCTION IN TAXESThese policies include reducing household taxes and corporate
taxes.Reducing household and corporate taxes can encourage the workers to
work harder and the firms to increase their budget for production and research and development.
LABOR MARKET REFORMSThis policy aims to provide more benefit for the firms so the
output from the firms may increase.This policy aims to reduce minimum wages so firms can become more
competitive. It also can include the reduction of unemployment benefits to help the firm from the burden of unemployment.
WEAKENING GOVERNMENT CONTROLThese policies include deregulation and privatization and
increasing competition.By reducing regulation and encouraging privatization competition is
encouraged in the market. It is assumed that competition will lead the market to market equilibrium that is fair for both buyers and sellers.
SOURCESText bookhttp://www.investopedia.com/http://www.dineshbakshi.com/ib-economics/macroeconomics/
165-revision-notes/1899-monetary-policy-and-the-economy