GOVERNMENT POLICIES USED TO
ACHIEVE MACROECONOMIC
OBJECTIVES
INTRODUCTION
• GOVERNMENTS AROUND THE WORLD OPERATE WITH A NUMBER OF MACROECONOMIC
OBJECTIVES . THE KEY MACROECONOMIC OBJECTIVES ARE :
-SUSTAINABLE ECONOMIC GROWTH
- LOW RATES OF INFLATION
- LOW LEVELS OF UNEMPLOYMENT
IN ORDER TO ACHIEVE SUCH OBJECTIVES , THE GOVERNMENT PUTS IN PLACE POLICIES SUCH
AS THE MONETARY , FISCAL , EXCHANGE RATE AND SUPPLY SIDE POLICIES .
FISCAL POLICY
• THE USE OF TAXATION AND GOVERNMENT SPENDING TO INFLUENCE AGGREGATE DEMAND
• REFLATIONARY/EXPANSIONARY FISCAL POLICY IS DESIGNED TO INCREASE AGGREGATE DEMAND .
THIS CAN BE ACHIEVED BY INCREASING GOVERNMENT SPENDING AND/OR CUTTING TAX RATES
• IN CONTRAST , DEFLATIONARY/CONTRACTIONARY FISCAL POLICY IS INTENDED TO LOWER
AGGREGATE DEMAND . THIS TIME , THE GOVERNMENT WILL REDUCE ITS SPENDING AND/OR
INCREASE TAXES
• DISCRETIONARY FISCAL POLICY REFERS TO DELIBERATE CHANGES IN GOVERNMENT SPENDING AND
TAXATION
• AUTOMATIC STABILISERS ARE CHANGES IN GOVERNMENT SPENDING AND TAXATION THAT OCCUR
TO REDUCE FLUCTUATIONS IN AD WITHOUT ALTERING GOVERNMENT POLICY[EG, DURING A
RECESSION , GOVERNMENT SPENDING ON UNEMPLOYMENT AUTOMATICALLY RISES BECAUSE THERE
ARE MORE UNEMPLOYED PEOPLE. TAX REVENUE FROM CORPORATION TAX AND INCOME TAX WILL
FALL AUTOMATICALLY AS PROFITS AND INCOME DECLINE .
MONETARY POLICY
• MONETARY POLICY REFERS TO ANY POLICY MEASURES OR INSTRUMENTS TO INFLUENCE THE
PRICE OR QUANTITY OF MONEY. THE THREE INSTRUMENTS OF MONETARY POLICY ARE
INTEREST RATES , MONEY SUPPLY AND EXCHANGE RATES .
• MONETARY POLICY LIKE THE FISCAL POLICY , SEEKS TO INFLUENCE AGGREGATE DEMAND
.EXPANSIONARY TO INCREASE AD. IN THIS CASE THIS MAY BE ACHIEVED BY A CUT IN THE
INTEREST RATE, INCREASE IN MONEY SUPPLY AND A REDUCTION IN THE FOREIGN EXCHANGE
RATE
• THE CONTRACTIONARY MONETARY POLICY INVOLVES A RISE IN THE INTEREST RATE , A
DECREASE IN THE MONEY SUPPLY AND AN INCREASE IN THE FOREIGN EXCHANGE RATE
SUPPLY SIDE POLICIES
• THESE ARE MEASURES PUT IN PLACE TO INCREASE AGGREGATE SUPPLY BY IMPROVING
WORKINGS OF PRODUCT AND FACTOR MARKETS
• EXAMPLES OF SUPPLY SIDE POLICIES INCLUDE CUTTING CORPORATION TAX , CUTTING
INCOME TAX , REDUCING WELFARE PAYMENTS , INCREASING SPENDING ON EDUCATION AND
TRAINING ,INCREASING SPENDING ON INFRASTRUCTURE AS WELL AS GOVERNMENT
SUBSIDIES .
SUMMARY
EFFECTS OF GOVERNMENT
MACROECONOMIC POLICIES ON
BUSINESSES AND BUSINESS
DECISIONS
FISCAL POLICY
• LOCATION DECISIONS :CHANGES IN TAX RATES CAN INFLUENCE WHERE SOME BUSINESSES
LOCATE . IF THE GOVERNMENT REDUCES TAXES ON A BUSINESS TO BELOW THOSE IN OTHER
COUNTRIES , IT MAY LEAD TO SOME BUSINESSES RELOCATING TO THAT COUNTRY PARTICULARLY
THOSE BUSINESSES THAT DO NOT INCUR HUGE COSTS IN MOVING LOCATIONS . EQUALLY ,
IMPROVEMENTS TO A COUNTRIES INFRASTRUCTURE MAY REDUCE COSTS OF PRODUCTION ,
MAKING IT AN ATTRACTIVE LOCATION
• PRODUCTION DECISIONS : BUSINESSES MAY ADJUST THEIR PRODUCTION LEVELS ACCORDING TO
LEVEL OF TAXATION &GOVERNMENT SPENDING. REDUCTIONS IN TAXES AND AN INCREASE IN
GOVERNMENT SPENDING CAN LEAD TO INCREASED DEMAND MEANING BUSINESSES MIGHT HAVE
TO EMPLOY MORE PEOPLE OR BECOME MORE TECHNOLOGICALLY ADVANCED IN ORDER TO MEET
DEMAND AND MAKE PROFITS .IF TAXES INCREASE AND GOVERNMENT SPENDING DECREASES ,
BUSINESSES WILL INCREASE PRICES OF GOODS AND SERVICES , CUT DOWN ON THE NUMBER OF
WORKERS AND IN SOME CASES SOME BUSINESSES ARE CLOSED .
MONETARY POLICY
• INTEREST RATES : AN INCREASE IN INTEREST RATES INCREASES COST OF BORROWING . THIS
WILL REDUCE CONSUMER SPENDING AND AS A RESULT BUSINESSES MIGHT BE FORCED TO
REDUCE PRICES AS WELL AS CUT DOWN PRODUCTION COSTS IN ORDER TO MAKE PROFITS. IT
ALSO DECREASES INVESTMENT WHICH WILL CAUSE A SHARP INCREASE IN UNEMPLOYMENT
RATES
• A DECREASE IN INTEREST RATES MIGHT WORK TO INCREASE AGGREGATE SUPPLY AS WELL AS
LOWER INFLATIONARY PRESSURES. THIS IS BECAUSE LOANS ARE CHEAPER THEREFORE FIRMS
CAN BORROW MONEY IN ORDER TO INCREASE PRODUCTION
MONETARY POLICY CONT…
• EXCHANGE RATES: AN APPRECIATION –A RISE IN THE EXCHANGE RATE WILL MAKE EXPORTS
MORE EXPENSIVE IN TERMS OF FOREIGN CURRENCY AND MAKE IMPORTS CHEAPER IN TERMS
OF DOMESTIC CURRENCY . AS A RESULT , DEMAND FOR DOMESTIC GOODS WILL FALL. LOWER
AD WILL RESULT IN A RISE IN UNEMPLOYMENT AND A SLOWDOWN IN ECONOMIC GROWTH
• A FALL IN THE EXCHANGE RATE-DEPRECIATION WILL MAKE EXPORTS CHEAPER IN TERMS OF
FOREIGN CURRENCY AND IMPORTS EXPENSIVE IN TERMS OF DOMESTIC CURRENCY. AS A
RESULT , DEMAND FOR DOMESTIC GOODS WILL INCREASE AND THIS WILL LOWER
UNEMPLOYMENT RATES AS BUSINESSES EMPLOY MORE WORKERS IN ORDER TO MEET DEMAND
AND MAKE PROFITS
MONETARY POLICY ….CONT
• MONEY SUPPLY: AN INCREASE IN THE MONEY SUPPLY WILL LEAD TO AN INCREASE IN
AGGREGATE DEMAND . THIS MEANS THAT CONSUMERS HAVE MORE TO SPEND AND AS A
RESULT FIRMS CAN INCREASE PRODUCTION AND MAXIMIZE PROFITS
• A DECREASE IN THE MONEY SUPPLY MEANS THAT CONSUMERS HAVE LESS TO SPEND AND
FIRMS WILL BE FORCED TO LOWER PRICES
SUPPLY SIDE POLICY
• CUTTING CORPORATION TAX MAY ENCOURAGE INVESTMENT AS BUSINESSES WILL HAVE MORE FUNDS
TO INVEST AND THEY WILL KNOW THAT THEY WILL BE ABLE TO KEEP MORE OF ANY PROFIT EARNED .
• CUTTING INCOME TAX MAY ENCOURAGE WORKERS TO INCREASE THEIR WORKING HOURS AND
ACCEPT PROMOTIONS AND GREATER RESPONSIBILITY . THIS WILL INCREASE OUTPUT AND COULD
POTENTIALLY INCREASE PROFITS FOR THE BUSINESS. THIS MIGHT ALSO WORK TO REDUCE THE
UNEMPLOYMENT RATE AS IT PERSUADES OTHERS TO ENTER THE LABOUR FORCE
• REDUCING WELFARE PAYMENTS MAY ENCOURAGE SOME UNEMPLOYED PEOPLE TO LOOK FOR JOBS
• INCREASED GOVERNMENT SPENDING ON EDUCATION AND TRAINING MAY IMPROVE QUALITY OF
EDUCATION AND SPENDING. AS A RESULT , FIRMS MANAGE TO GET EFFECTIVE WORKERS WHO WILL
MAKE LITTLE TO NO MISTAKES AND AVOID WASTING WHICH WILL LOWER THE COST OF
PRODUCTION
THE END 