Government Economic Policy Essay Example | Topics and Well Written Essays - 3000 words

disposal Economic Policy - Essay ExampleGovernments briny objectives of using this type of policies is to stimulate the add up demand, decrease inflation, improve a recession, collection of revenue to provide public goods, improve on market visitation ca subprogram by externalities or even steer the economy to achieve higher growth.as earlier discussed the main objectives of presidential term policies is to improve on a recession, depression, inflation, solve on market failure caused by confirming and negative externalities, collection of governing revenue to provide public goods and to stimulate aggregate demand. These policies will excessively be used in case of a boom in the economy. The policies can be used together to improve a situation or one of them used.Inflation can be delineate as the consistent rise in the general prices of goods for a fairly long period of time, the about used indicator of inflation is the consumer price index. Inflation is caused by demand pus h according to Keynes he argued that inflation will exist when the aggregate demand exceeds aggregate make out. The excess demand can be from the real sector or the monetary sector.TheThe real sector consist of the model that is used to wager the national output, Y = consumption + government spending + investment + exports - imports. if marginal propensity to consume cast ups therefore aggregate demand will join on leading to inflation, if government spending increases then this will increase aggregate demand also if the level of investment increases this will cause an increase in the aggregate demand and finally if the exports increase then aggregate demand increases and this can be seen when there is a boom caused by increased exports. The monetary sector means that in the case where the money supply in an economy increases this triggers inflation.The other type of inflation is the cost push inflation caused by an increase in the cost of production due to an increase in the p rice levels of Raw materials. an increase in the cost of production will lead to high unit cost of production, these high prices atomic number 18 passed on to the consumers, therefore their real wages decreases and trade unions come in and fight for high wages and if they are granted higher wages the cost of production further increases. In case of inflation the government will come in and interfere with the economy, in this case the government will simply use monetary policies to improve the situation, they will increase the rate of interests so that the amount of money in circulation in the economy reduces, the government will also improve this by reducing the supply of money in the economy, this can be achieved through increasing the bank reserve ratio held by a key bank.This can be diagrammatically shown as followsWhen inflation increases from 0 to 1 then the real gross domestic product falls from y0 to y1, if y0 was the potential output then the economy is operating below pot ential output, to improve this government will reduce the interest rates the interest rates