Ch 37 - Economic Policy and Policy Instrument

Policy InstrumentsEconomic variables that can be adjusted by

the government

Policy Instruments

Tax rates

Interest rates

Government

Expenditure

Reserve Ratio

Policy Instruments

What can changes in policy instruments affect?Aggregate demand

Inflation

Unemployment

GDP

Economic PolicyThe range of actions taken by the government

to help achieve its macroeconomic objectives

Economic Policy

Fiscal Policy

Monetary Policy

Supply Side

Policies

Other Economic Policies

Economic Policy

Fiscal policy Use taxation and government expenditure to

influence the aggregate demand Influence the behaviour of firms and individuals Influence the economy as a wholeControlled by Government

• John Maynard Keynes (5 June 1883 – 21 April 1946)

Economic policy

Monetary Policy Use the interest rate and reserve ratio to

influence the aggregate demand Changes in interest rate Affect the amount

borrowed Aggregate demandControlled by Central Bank

• Milton Friedman (31/7/1912 – 16/11/2006)

Economic Policy

Supply side policies Increase the productive potential of the economy Make markets and industries to operate more

efficiently Contribute to the national income

Supply Side PolicyMarkets targeted by supply side policies

1. Labour market Make it more flexible Tax incentive Increase labour mobility Improve the quality of labour (Education and Training)

2. Capital market Measures have been used to increase investment by firms Increase government spending Reduce Red-Tap

3. Goods market Promote more competition E.g. Privatisation, deregulation, etc.

Economic Policy

Other economic policies Environmental policies Exchange rate policies Influence the current

account on balance of payments