3. FISCAL POLICY
Fiscal 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.
4. 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.
5. 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.
6. MONETARY POLICY
Monetary 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
7. 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.
8. 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.
10. INTERVENTIONIST POLICY
Interventionist 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
11. INVESTMENT IN HUMAN CAPITAL
Education 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
12. RESEARCH AND DEVELOPMENT (R&D)
Research and Development aims to improve methods of production and
consequently increase potential output
The 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
13. PROVISION AND MAINTENANCE OF
INFRASTRUCTURE
Provision 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
14. DIRECT SUPPORT FOR BUSINESSES
Direct support for businesses aims to advance certain industries that the
government find attractive
Government may directly support a business by improving competitive
nature/decreasing competition, supporting businesses in their access to
markets abroad.
15. MARKET-BASED POLICIES
Market-based policy focuses on allowing the invisible hand of the market
to solve all the problems in the market
There are numerous market-based policies, but we will group them into the
following groups
• Reduction in taxes
• Labor market reform
• Weakening government control
16. REDUCTION IN TAXES
These 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.
17. LABOR MARKET REFORMS
This 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.
18. WEAKENING GOVERNMENT CONTROL
These 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.
