ROLE OF
GOVERNMENT IN
MACRO ECONOMY
MACRO ECONOMIC POLICIES
LEARNING OBJECTIVES
• Describe each type of policy
- Monetary
- Fiscal
- Supply side
• Give examples of each
REVIEW…
The main macro economic objectives of
the government include:
* Higher
economic
growth
•
* Low inflation
•
* Low Unemployment
* Balance of payments
equilibrium
Economic Indicators
GOALS
Higher economic
growth
Low Inflation
Low
Unemployment
Positive Balance
of Payments
INDICATORS
Macro-economic policy
• Is drawn up by government
• Are tools used to influence the country’s
economy
• OBJECTIVE:
> GDP growth
> Low inflation
> Low unemployment
GROUP TASK
• Can you find a suitable
description and some
examples of each of these policies?
1) MONETARY POLICY
2) FISCAL POLICY
3) SUPPLY SIDE POLICY
TYPES OF POLICY TOOLS
• Fiscal policy, which involves
changes in taxation or
government spending.
• Monetary policy, which
involves changes in interest
rates or the supply of money.
• DEMAND
SIDE
POLICIES
TYPES OF POLICY TOOLS
* Improving
competition
• SUPPLY
and efficiency in product
SIDE
and factor markets.
POLICIES
• Providing incentives for
households to work or save.
* Providing incentives for firms to
produce and invest.
MONETARY POLICY
• Monetary policy
is carried out by
the Central
Bank /
Monetary
authorities
•So how
does this
work???
MONETARY POLICY
• Monetary policy relates to the supply of money
• It is controlled by factors like: a) interest rates
b) Reserve Requirements (CRR)
•EXAMPLE
• To control high inflation, policy-makers (CENTRAL
BANK) can raise interest rates thereby
reducing money supply.
MONETARY POLICY
• Monetary policy involves influencing the
money supply.
MONETARY POLICY
Interest rate
MONEY SUPPLY
HOW MONETARY POLICY
WORKS !!!
• Central Bank sets an
inflation target
• If inflation is ABOVE
2%... They increase
interest rates
• increase borrowing
costs
• reduce consumer
spending
lower aggregate demand
and lower inflation.
INFLATION RATE
MONETARY POLICY
• Interest rates are set so that the inflation
target can be met in the future.
• It takes up to two years
for a rate change to affect
inflation
EFFECT OF INTEREST RATE
CHANGES
INTEREST RATE CHANGES AFFECT:
How?
• Households
• Business
• Consumer and business confidence
• Asset values
• Exchange rates
DECREASING INTEREST RATES
•
• Will discourage
saving
• Will encourage
household spending
• Will increase AD
AS
AD2
AD1
• What about
Price???
FISCAL POLICY
• Fiscal Policy is carried out by the government and involves
changing:
• Level of
government
spending
• Levels of taxation
FISCAL POLICY DESCRIPTION
• Fiscal policy relates to: a) government spending
b) revenue collection.
•EXAMPLE
• WHEN DEMAND IS LOW in the economy, the government can
increase its spending to stimulate (increase)
demand.
• OR
• it can lower taxes to increase disposable income for
people and firms.
FISCAL POLICY
• To increase demand
and economic
growth, the
government will
cut tax and
increase spending
(leading to a higher budget deficit)
SO …
• Fiscal policy involves the government changing
the levels of taxation and government spending
Why
?
….. to influence
Aggregate Demand (AD) and the
level of economic activity.
PAIRED TASK
Using a
diagram is
the effect
of an
Increase/
decrease
in tax?
FISCAL POLICY
EXPANSIONARY
•
This involves increasing AD
• Therefore the
government will increase
spending (G) and / or cut
taxes (T).
increase
consumers spending
• Lower taxes will
because they have more disposable
income (C)
• This will tend worsen the
government budget deficit and the
government will need to increase
borrowing.
FISCAL POLICY
DEFLATIONARY
•
• This involves decreasing
AD.
• Therefore the government
will cut government
spending (G) and / or
increase taxes.
• Higher taxes will reduce
consumer spending (C)
• Tight fiscal policy will tend
to cause an improvement
in the government budget
deficit.
HOW IT WORKS/
• When inflation is too strong, the economy may need a
slowdown. In such a situation, a government can use fiscal
policy to increase taxes to suck money out of the economy.
High inflation
T
A
X
WHICH IS MORE EFFECTIVE?
• MONETARY POLICY
Refer to the
worksheet
and
complete
the task.
FISCAL POLICY
MONETARY vs FISCAL
• Monetary policy is quicker to
implement. (Interest rates can be set
every month).
• A decision to increase
government spending
may take time to decide
where to spend the money.
SUPPLY SIDE POLICY
• Is used when more employment is
needed.
• Refers to factors affecting the quantity or
quality of goods and services produced
by an economy
• Supply-side policies are mainly microeconomic policies designed to make
markets and industries operate more efficiently
AIM…
• Achieve
economic
growth
• Stabilise
the
economy
•
SUPPLY SIDE OBJECTIVES
• invest in people’s skills
• Increase labour and capital productivity
• Increase mobility of labour
• Increase capital investment
• Increase research and development spending by
firms
• Promoting more competition
• Encourage the start-up and expansion of new
business
EFFECT OF INCREASE IN A’S’
• illustrates a simplified
macroeconomic
equilibrium:
Increase in AS
• aggregate
demandand aggregate
supply intersect =
overall price and output
levels)
an increase in supply (i.e.
production of goods and
services) will increase
output and lower prices.
So what are supply side
policies?
• are government policies to
improve the supply side of the
economy in the long term
•
They improve the productive
potential of the economy.
Read more at http://www.s-cool.co.uk/alevel/economics/aggregate-demand-and-aggregate-supply/reviseit/supply-side-policies#FkjhBVUCvkwqF7Ev.99
INCREASE IN AGGREGATE
SUPPLY
•
• Prices will decrease
• Unemployment will
decrease
• Productivity will
increase
SUMMARY
All 3
work
together
SUPPLY SIDE