Impact of Government Policies on Macroeconomic Objectives
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Government policies play an important role in influencing the macroeconomic objectives of an economy, which include economic growth, low unemployment, price stability, and BOP stability. These policies can be divided into fiscal policy, monetary policy, and supply-side policies.
Fiscal policy are changes made to taxation and government spending to change aggregate demand.
Economic Growth: By increasing government spending and reducing taxes, people have more disposable income which will encourage spending and investment. This will lead to more goods and services being produced in the country.
Unemployment: Higher government spending can create jobs directly, while tax cuts can urge businesses to hire more workers. This reduces unemployment rates.
Price Stability: After a point, expansionary fiscal policies can lead to demand-pull inflation
Balance of Payments: Excessive growth in demand may lead to higher imports due to higher disposable income which worsens the trade balance
An expansionary fiscal policy increases aggregate demand via a decrease in taxation and increase in government expenditure. Contractionary fiscal policy is an increase in taxation and decrease in government expenditure.
Monetary policy is implemented by the central bank is aimed to increase aggregate demand by changing money supply and interest rates.
Economic Growth: Lowering interest rates reduces the cost of borrowing, encouraging investment and consumer spending. In contrast, high interest rates can slow economic growth.
Unemployment: Expansionary monetary policy can reduce unemployment by increasing demand for goods and services, which results in an increase in labor demand due to more supply having to be produced.
Price Stability: Controlling inflation is a key aim of the government. Raising interest rates can restrain inflation, while lowering them can prevent deflation.
Balance of Payments: Changes in interest rates affect currency exchange rates, influencing export competitiveness and import costs.
Expansionary monetary policies increases money supply and reduces rate of interest while contractionary monetary policies are the exact opposite.
Supply-side policies aim to improve the productive potential of the economy or potential economic growth.
Economic Growth: Investments in education, training, and technology can enhance productivity, leading to sustainable long-term growth.
Unemployment: Policies that improve labor market flexibility, such as reducing trade union power or offering training programs, can lower structural unemployment.
Price Stability: Enhanced efficiency can reduce production costs, helping to control inflation.
Balance of Payments: By improving competitiveness, supply-side measures can boost exports and reduce reliance on imports.