Government Aims and Types of Policies

Question 1

What are the common government macroeconomic aims?

Answer 1

• Full employment
• Economic growth
• BOP stability
• Equal distribution of income
• Stable inflation
• Sustainable development

Question 2

What is full employment?

Answer 2

It occurs when people who are willing and able to work can find employment / employed.

Question 3

What is price stability?

Answer 3

It occurs when the government minimizes fluctuations in general price levels of goods and services.

Question 4

What is economic growth?

Answer 4

A rise in GDP/ head over time.

Question 5

What is equal distribution of income?

Answer 5

It is when a government seeks to distribute income from the rich to the poor, in order to reduce the gap between the rich and the poor. The government does this by taxing high-income earners than low-income earners.

Question 6

What is BOP stability?

Answer 6

It occurs when a government tries to make export revenue equal to import expenditure.

Question 7

What is sustainable economic growth?

Answer 7

It states that an economy should utilize its resources in a way that some of it is preserved for future generations. rather than exploiting them at present.

Question 8

What are microeconomic policies?

Answer 8

These policies are designed to influence the individual markets such as the labor market - National Minimum wage, the agricultural market - minimum prices, the housing market - maximum prices, demerit goods - indirect taxes, etc.

Question 9

What are the types of policies used to achieve macroeconomic objectives?

Answer 9

Demand management policies

Supply-side policies

Question 10

What are instruments of fiscal policy?

Answer 10

Government spending

Government revenue/taxation

Question 11

What is fiscal policy?

Answer 11

Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation’s economy.

Question 12

What is the function of reflationary/expansionary fiscal policy?

Answer 12

It involves rises in government expenditure and cuts in taxation designed to increase aggregate demand. It can be implemented at a time of recession, to allow people more money to spend on goods and services.

Question 13

What is the function of deflationary/contractionary fiscal policy?

Answer 13

It involves an increase in government taxation and a cut in government spending designed to reduce aggregate demand. It can be implemented at a time of inflation.

Question 14

What are the aims of fiscal policy?

Answer 14

• To achieve macroeconomic stability
• Funding of government expenditure without a damaging rise in government debt.
• To achieve macroeconomic objectives such as full employment and Economic growth, for instance giving subsidies to encourage producers to produce more.

Question 15

What are the advantages of fiscal policy ?

Answer 15

Unemployment Reduction – When unemployment is high, the government can employ an expansionary fiscal policy. This involves increasing spending or purchases and lowering taxes. Tax cuts, for example, can mean people have more disposable income, which should lead to increased demand for goods and services. To meet the growing demand, the private sector will increase production, creating more job opportunities in the process.
Budget Deficit Reduction - A country has a budget deficit when its expenditures exceeds revenue. Since the economic effects of this deficit include increased public debt, the country can pursue contraction in its fiscal policy. It will, therefore, reduce public spending and increase tax rates to raise more revenue and ultimately lower the budget deficit.
Economic Growth Increase - The various fiscal measures a country employs facilitate expansion of the national economy. For example, when the government reduces tax rates, businesses and individuals will have a greater incentive to invest and steer the economy forward.

Question 16

What are the disadvantages of fiscal policy?

Answer 16

Conflict of Objectives - When the government uses a mix of expansionary and contractionary fiscal policy, a conflict of objectives can occur. If the government wants to raise more money to increase its spending and stimulate economic growth, it can issue bonds to the public. Since government bonds offer a range of benefits to buyers, individuals and businesses will buy them heavily, the private sector consequently will have little money left to invest. With reduced investment activity, the economy can slow down.

Inflexibility - There are usually delays in the implementation of fiscal policy, because some proposed measures may have to go through legislative processes.

Fiscal Policy is hard to use- It is hard for a government to decide when and by how much to expand public spending or cut taxes in a recession; raise spending or cut taxes in a recession or cut spending and raise taxes during a boom. If demand rises quickly and the supply doesn’t, demand-pull inflation can occur.

Crowding out effect - This occurs when the government borrows funds from the private sector in order to increase government spending, however, this actually decreases funds available to the public decreasing AD.

High taxes reduce work incentives, employment, and economic growth

Expansionary fiscal policy can increase inflation, due to high AD, people push thier wages to protect them from high prices in the future. Production costs increase, causing cost push inflation.

There is a serious time lag between the identification of the problem and the time the fiscal policy begins to take effect. Monetary policy is a more efficient regulator because it can be operated on a day to day basis.

Question 17

Describe a few conflicts of government aims when using fiscal policy.

Answer 17

When AD increases due to expansionary fiscal policy, the economy moves closer to full employment. Reducing taxes may encourage investment and in the long run, may achieve economic growth. However, price stability may be hard to achieve due to rising prices.
Rising prices may also lead to BOP disequilibrium as exports become expensive and imports become cheaper.
Reducing taxes may cause income inequalities, and the gap between low and high-income earners will widen.

When AD falls, the economy moves away from full employment, and unemployment increases. High tax discourages investment. Price stability may be achieved, as prices are low, exports increase and imports fall reducing BOP deficits.

Question 18

What is the monetary policy?

Answer 18

It is a demand management policy designed to influence AD with the use of three instruments; interest rates, exchange rate, and money supply.

Question 19

Describe the expansionary monetary policy.

Answer 19

It works towards increasing AD through increasing the money supply, decreasing interest rates, and devaluing the exchange rate. Increasing money supply results in greater money circulation within the economy. Low-interest rates will increase burrowings and decrease savings giving people more money to spend.
Depreciating the currency will lead to more exports and fewer imports.

Question 20

Describe the deflationary monetary policy.

Answer 20

It works towards decreasing AD trhough decreasing the money supply, increasing interest rates and revaluing the currency.
Reduced money supply, mitigates the money circulation of the economy.
Increased interest rates, discourages people from burrowing and encourages people to save more.
Currency revaluation, makes imports cheaper and exports expensive.

Question 21

Describe the exchange rate policy.

Answer 21

It is a form of monetary policy and is associated with fixing the currrency to another currency.
The government can influence the value of currency using the direct method (buy and sell it’s currency) or indirect method ( by changing interest rates)

Question 22

What are the consequences of revaluation under the exchange rate policy?

Answer 22

Revaluing the currency will shift the AD to the left as exports are expensive and people demand less of it. This will put downward pressure on inflation. It will ultimately lead to a current account deficit .

Question 23

What are the consequences of devaluation under the exchange rate policy

Answer 23

Devaluing the currency will shift AD to the right, given that exports become cheaper and imports become expensive which would drive people to look for domestic substitutes .

Question 24

Describe supply side policy.

Answer 24

Supply side policies are designed to increase the AS of a country by improving the quality and quantity of production. The main aim is to move the LRAS curve to the right.

Question 25

What are the measures of supply side policies?

Answer 25

01) Government spending on education and training
02) Government subsidies to producers
03) Reduction of unemployment benefits
04) Elimination of trade barriers will encourage firms to enter the market.
05) Decrease in income tax/ cooperation tax
06) Privatisation and deregulation
07) Trade union reforms

Question 26

What are the benefits of supply side policy?

Answer 26

• Increase economic growth with higher GDP
• More job opportunities
• Increase in AS will reduce price levels, inflation will be controlled
• Decreased prices levels will reduce the price of exports, increasing International competitiveness .

Question 27

What are the costs of supply-side policy?

Answer 27

• it will cause demand-pull inflation, as people have more money due to employment
• High production may lead to exploitation of resources
• Higher-income may lead to a Bop deficit as people look for import quality products
• Some supply-side policies will take effect in the long run such as investment in education and R&D.

Question 28

How does fiscal policy lead to economic growth?

Answer 28

• If the government increases spending on infrastructure, and education, it will directly increase output.
• Lower-income tax increases disposable income and increases expenditure, this will encourage firms to produce more.
• Reduction in cooperate tax, increases total supply.

Question 29

How does monetary policy lead to Economic growth?

Answer 29

• Reduced interest rates increase consumer demand and investment, production will go up.
• reduction in exchange rate will make exports cheaper
• more money supply means people will soend more

Question 30

How do supply-side policies lead to economic growth?

Answer 30

• Education and training increase productivity
• Deregulation reduces the cost of production
• Privatization increases efficiency
• Helps achieve growth without inflation

Question 31

How can fiscal policy be unsuccessful?

Answer 31

• these measures take time to have an effect

- people may not respond quickly due to a lack of confidence

Question 32

How can monetary policy be unsuccessful?

Answer 32

• If the interest rate reduces, people will save less, and they have to think about their future too.
• More money supply leads to demand-pull inflation
• If the exchange rate falls, imports become expensive and exports become cheap, if PED for these products are inelastic, the government will fail to achieve its aims.

Question 33

How can supply-side policy be unsuccessful?

Answer 33

• It takes a long time to have an effect
• Privatisation may lead to inefficiency and can monopolize the market
• These policies can be very expensive