macroeconomic policies

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MACROECONOMIC POLICIES BY ANTO AND DAV ID

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Macroeconomic Policies. By Anto and david. Demand side policies. Include Fiscal P olicy Monetary Policy. Fiscal Policy. - PowerPoint PPT Presentation

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Page 1: Macroeconomic Policies

MACROECONOMIC

POLIC

IES

B Y AN T O A

N D DA V I D

Page 2: Macroeconomic Policies

DEMAND SIDE POLICIES

Include

Fiscal PolicyMonetary Policy

Page 3: Macroeconomic Policies

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.

Page 4: Macroeconomic Policies

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.

Page 5: Macroeconomic Policies

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.

Page 6: Macroeconomic Policies

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

Page 7: Macroeconomic Policies

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.

Page 8: Macroeconomic Policies

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.

Page 9: Macroeconomic Policies

SUPPLY SIDE POLICIES

Interventionistvs

Market-Based

Page 10: Macroeconomic Policies

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

Page 11: Macroeconomic Policies

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

Page 12: Macroeconomic Policies

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

Page 13: Macroeconomic Policies

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

Page 14: Macroeconomic Policies

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.

Page 15: Macroeconomic Policies

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

Page 16: Macroeconomic Policies

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.

Page 17: Macroeconomic Policies

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.

Page 18: Macroeconomic Policies

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.

Page 19: Macroeconomic Policies

SOURCESText bookhttp://www.investopedia.com/http://www.dineshbakshi.com/ib-economics/macroeconomics/

165-revision-notes/1899-monetary-policy-and-the-economy