Economics Policies

Alex T. Zhao, Marcus Lee, Jason Jeong, Mervin Law

Divided into two big groups

• Demand Side Policies– Increase/decrease AD– AD = C + G + I + Xn

• Supply Side Policies—Aimed towards increasing quantity and quality of FOP, and improve incentives

Demand Side Policies• Fiscal Policies– Two TOOLs:

• Government Spending and Taxes

– Expansionary Fiscal policy• Increased Gov. Spending

– Multiplier effect• Decreased taxes

– Influence C and Inv. (Promote spending)

– Contractionary Fiscal Policy• Dec. Gov Spending• Increase Taxes

• Monetary Policies– TOOL: Interest rates

(controlled by the Central Reserve not the government)

– Easy Monetary• Lower interest rates

– Affect C and I and Xn.– Exchange rate depreciate exports more competitive

– Tight Monetary• Increase interest rates

Demand Side Policies (cont.)

• Multiplier effect– Increased government

spending becomes people’s income, which lead to more spending, generating a multiplier effect such that the final increase in AD is greater than the initial government spending

Demand Side Policies (Cont.)

• Automatic Stabilizers– Involves Progressive Tax system and unemployment

benefits

– Eg: Bad economy Less Real income Less tax collected (due to progressive Tax system) and more unemployment benefits (government spending)automatic stabilization.

EVALUATION (Demand Side• Fiscal

– Direct– Automatic Stabilizers– Effective in recession (when monetary policy

is not effective since interest rate approx. 0)– Multiplier effect

– Time lags– Large Deficit spending national debt– Inflationary pressures– Crowding Out effect– Indiscriminate spending just to get re-

elected?– May lead to wide trade deficit (higher

income, more imports)– Contractionary fiscal policy against inflation

is hard to execute.– Not flexible can’t stop the building of a

bridge!

• Monetary– Considered very flexible– Interest rate can be altered gradually or

incrementally– Easily reversed if all goes to ****

– C Does not only depend on interest rates– Does not work well in deep recession– Time lag shorter than fiscal but still

exists– Fixed exchange rate system not

effective (constrained to using interest rates to maintain fixed exchange rates_

– Global financial markets weaken effectiveness of domestic monetary policy.

Supply Side Policies

• Review: Aimed towards increasing quantity and quality of FOP, and improve incentives

Supply Side Policies (Cont.)

• Market Based (little or no government intervention)– Product Market Based– Labor Market Based– Incentive Based

• Interventionist Supply Side (government intervention

Supply Side—Market Based• Product Market

Based– Deregulation

(reduce health and safety regulations

– Privatization (improve competition and efficiency

– Trade Liberalization—decrease domestic monopoly power

• Incentive Based:– Lower income tax (more incentive to work

harder?)– Reduction in Corporate Taxes (more profit)

• Labor Market Based– Legislation against trade unions– Reduce unemployment benefits– Reduction/elimination of minimum

wages– Reduce non-wage labor costs– Making hiring and firing easier– Making pension plans transferable

across occupations (Labor mobility increases)

Supply Side--Interventionist• Investment in Human Capital: Education and Training

to increase efficiency and productivity• Research and Development (new technologies)• Provision and maintenance of infrastructure

– Note: Infrastructure—large scale capital necessary for economic growth

– *Note: Also imply increase of AD in the short run (due to increased government spending*

• Direct support for business/industrial policies (subsidized low interest rates, tax breaks, tax allowances, and protection from foreign competition.

EVALUATION (Supply Side)Advs.• Lowered inflation• Increased employment• Improved sustainable rate of

economic growth by increasing AS

• Increased level of competition and efficiency

• Fewer distortions to the price mechanism

• Increased flexibility in labor markets

• Fewer built in disincentives

Disadvantages (market based)• Benefits take long time to materialize

effective in long run, not short run• Tax cuts leisure and less labor investment,

further skewing an inequitable income distribution

• Privatization unemployment (short run)• Deregulation may be unsuccessful• Lead to increased income inequality (lack of

benefits) economic and social costs in the future.

Disadvantages interventionist• Opportunity cost• Distorted product markets• Distorted labor markets (inefficient,

inequality)

For more info. Wow that was a long presentation ZZZZZZ…

• http://www.economicshelp.org/macroeconomics/economic-growth/supply-side-policies/

• http://www.slideshare.net/ajmccarthynz/34-demand-and-supply-side-policies

• Study guide pages 98--109

• http://theinvisiblehand.wikispaces.com/file/view/Aggregate%20Supply.IB.2012.pdf/325375442/Aggregate%20Supply.IB.2012.pdf