Grade 8A IGCSE
_________________________________Penabur International- Jakarta________________
The macroeconomic objectives of a government can prove difficult to achieve
all at once. In some cases policy aims might conflict. For example, some policy
measures to reduce unemployment and boost economic growth may result in
higher rates of price inflation.
- 5.1.4: Discuss up to what extent do you agree that fiscal and monetary policy instruments are like double edge sword if not used wisely may prove more harmful for a country.
Last date for Submission:
May 18th, 2014
Please Write Your Response in 750 Words
Note:
Marks allocation for this article is 20.
Rubrics for Marks.
A. Theoretical Explanation 5 Marks
B. References. 5 Marks [Use Harvard referencing style]
C. Use of Key words. 5 Marks
D. Evidences in the support of explanations 5 Marks
Fiscal policies measures policies undertaken by government in form of public revenue, public expenditure, and public borrowings which deals with how to borrow. Public revenue is income realized by the government for purposes of financing public adminstration. In public revenue there are tax which may be direct or indirect tax. Direct tax are paid directly to the governmnent while indirect tax are paid indirectly to government. An example of direct tax is income tax and an example of indirect tax is service tax. Another public revenue that government receive is penalty for example traffic penalty. Fees or certain amount of money paid in exchange of service such as driving lisence. Profit from any public company. Disinvestment which is when public company is sold to private company/privatization. Public expenditure is spending made by the government of a country on collective needs and wants such as pension, provision,infrastructure, etc. Public expenditure includes public good and services such as transportation and health, public sector enterprise, infrastructre such as road and hospital, capital investments, internal and external security measures such as military and police, and last current expenditure.
ReplyDeleteMonetary policy deals with money and it’s organized by central bank. Monetary policy includes interest rate which is rate at which we borrow from commercial bank. Bank rate which is the rate at whcih commercial bank borrow from central bank. Cash reserve ratio which is the minimum amount of cash needed in a bank. Last statuary liquidity ratio which is the proportion of total money kept by commercial bank.
In a country, government main objective is to achieve low and stable infation, high and stable employment , economic growth, and position of international trade. inflation or general and sustainable rise in price level in a specific period is the most important objective in a government. Inflation also reffered as aggregate supply is less than aggregate demand. Because if there is a high inflation disposable income will decrease, poverty will increase, fall in value of money, and fall in standard of living. Unemployment is the condition where willing worker ready to work at existing wage rate but fails to get a job. If unemployment increase then the problems that will arise are fall in disposable income, fall in aggreagate demand, and increase in public expenditure to help people that aren’t working because they have no wage to be receive. Economic growth can be indicated by rise in national income. International trade is trade with rest of the world which involve export and import.
ReplyDeleteFiscal and monetary policy is important to government to achieve their objective such as low inflation because by charging more income tax then there will be fall of disposable income of people which will result in decrease in aggregate demand for products that will decrease inflation. But decreasing direct tax also can give benefit to government as lower direct tax motivated people to work in the same time unemployment will decrease. Income tax also can effect import and export as increase in income tax will decrease disposable income and create less aggregate demand for imported products especially from the rich people. Decrease in indirect tax will encourage producer to increase production and increase aggregate supply and decrease infation. Government also can make a new rules and reguation that decrease corporate tax that will encourage multinational company to invest on the country that will bring more employment and more economic growth as people’s income increase. If government increase interest tax it will also people to borrow less and aggregate demand will fall in the same time inflation will decrease.
But it can be a contra effect if government don’t control the policy well and may cause disadvantage and problems such as if government will charge more income tax to reduce infation people may lost their disposable income and poverty will increase, therefore there will be fall in standard of living that also happen if inflation increase. Lower direct tax to increase employment can rise inflation as increase in disposable income make people able to spend more and increase aggreagate demand to increase inflation. If government increase income tax to create less demand for imported products it will create a double disadvantage. First people can lose disposable income and increase poverty, also fall in standard of living. Second, if the country depends on imported products rather than local products it will create less aggregate supply as more products were imported rather than from local market. Increase in corporate tax that will encourge multinational companies to settle in a country will also create disadvantage such as exploitation of resources, profit were carried outside and not reinvested on the country, low paid jobs, and pollution. If government increase interest tax that will create less chance of people to start their business or to invest because people are worried that they are not able to repay their debt in the future as the interest rate increase.
My conclusion is I agreed that fiscal and monetary policy can give another problem and even worse problem if it’s not use wisely which can be harmful. So it must be use in the correct dose and use it carefully and not instantly which may create another problem.
ReplyDeleteReference :
http://wiki.answers.com/Q/Define_public_revenue?#slide=1
http://en.wikipedia.org/wiki/Public_expenditure
https://answers.yahoo.com/question/index?qid=20100224091118AAH0mh3
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Governments generally have 4 main basic macroeconomic objectives, including low and stable inflation, high and stable employment, high and sustainable economic growth, and a stable balance of international trade and payments. Macroeconomics is a part of economics that studies and deals with an economy as a whole, instead of from the perspectives and decisions of individuals and firms. Macroeconomists generally study economy-wide phenomena including, but not limited to, employment, national income, rate of growth, gross domestic product, inflation, changes in price levels, and international trade and payments. In order to try to achieve these 4 basic objectives, the government may most effectively act as the regulator in an economy. The government may impose taxes, fees, or penalties to both individuals and firms in order to ultimately achieve one or more of the 4 objectives. But it may be difficult to achieve all objectives at the same time
ReplyDeleteBasically, there are 2 types of government policies: fiscal and monetary. Fiscal policy is the use of public revenue collection and expenditure to control and regulate the economy, and may have significant impacts on aggregate demand and supply, distribution of income, and the pattern of resource allocation within the government and relative to the private sector. Examples of public revenue used in fiscal policies are taxes, fees/licenses, penalties, profits of Public Sector Enterprises (PSEs), and disinvestments. Disinvestment is the action undertaken by a government (as well as organizations) that involves the sale or liquidation of assets and subsidiaries, also known as “Divestiture”. Disinvestment may also be recognised as a reduction in capital expenditure, or the decision of a firm to not replenish capital goods that are depleted. Examples of public expenditure used in fiscal policies are the public purchase of goods and services, expenses of PSEs, infrastructure expenditures, capital investments, and expenses on internal and external security measures. On the other hand, monetary policies are In order to achieve these objectives, fiscal and monetary policies are meticulously imposed, but different goals require different policies. Monetary policies involve changes in interest rates, bank rate, Cash Reserve Ratio (CRR), and Statuary Liquidity Ratio (SCR). Monetary and fiscal policies may bring negative impacts on other objectives. Achieving more than one objective at once is very difficult for the government, and achieving all the objectives in the same period of time is practically impossible. Policies undertaken to solve inflation, for example, may worsen the economic growth and employment.
A healthy economic growth can grow too fast, especially if it’s due to excessive consumer spending, which will encourage firms to produce more goods and services, therefore more production and growth. Such as in the UK, this aggregate demand will someday outstrip aggregate supply, in which as the case in the UK, will cause a rise in price and hence more inflation. Similarly, in order to keep inflation low and stable, interest rates are reduced, but this can often restrict growth due to a reduction in consumer spending and investment, therefore it is very difficult to achieve both objectives at the same time. In another case, healthy economic growth is also conflicting against balance of international trade and payments. When an economy is quickly growing, consumer expenditures are often high. Again in the case of UK, British citizens prefer imported and foreign goods instead of their locally produced goods, therefore an increase in consumer expenditure means an increase in demand for imported goods, and hence imports will rise while exports would not significantly change as much. This rise in imports causes an imbalance in international trade, hence only one of these two objectives are likely to be achieved at a given time. Employment and inflation are also conflicting as they both (in theory) have an inverse relationship. If the government tries to increase employment through reflationary measures, such as lower interest rates and increased public spending, it will increase employment, wages, and ultimately prices of goods and services, and hence more inflation. Similarly, a healthy growth of an economy brings negative impacts on the environment and equality, but these 2 objectives are not included in the 4 main government objectives, whereas they are included in secondary objectives of the government.
ReplyDeleteIn contrast, fiscal and monetary policies can be fairly effective in achieving these 4 macroeconomic objectives. In order to achieve more than one objective at the same time, governments must meticulously impose the most optimal fiscal and monetary policies. To achieve a healthy and sustainable economic growth, the government must increase production, and hence the productivity and number of firms. By making more firms, employment will rise automatically. If low-paid employees increase, more people will buy local goods because they don’t have much money, hence also helps increase economic growth. With the growth of the economy, more firms in the country will be invested on or be more confident to export their goods. This increase in exports may cause a good balance in international trade and payments.
ReplyDeleteTo conclude what we have discussed, both monetary and fiscal policies act like double or even triple edged swords because they can solve one problem and achieve one objective effectively but also brings bad or even negative significant effects on other problems and objectives.
Originality 86% based on http://smallseotools.com/plagiarism-checker/
References:
http://www.tutor2u.net/economics/content/topics/macroeconomy/government_policy.htm
http://tutor2u.net/economics/revision-notes/as-macro-supply-side-policies.html
Many economics criticized the used of fiscal policy to influence the level of aggregate demand and economic activity in an economy. They argue there is not a clear trade off between higher levels of inflation and lower levels of unemployment . for examples, many countries especially developed country have experienced high inflation and high unemployment at the same time and the overuse of fiscal policy has contribute to this condition, the problems are fiscal policy is cumbersome to use , increase in public expenditure crowds out private spending , increasing taxes on incomes and profits can reduce intensive to work and enterprise, an expansionary fiscal policy create expectation of inflation. It is difficult for a government to know when and by how much to expand public spending or cut taxes by during an economic downturn. To finance an increase in public spending in a cut in taxation a government may need to borrow the extra money it needs from the private sector, the more money the private sector lends to a government the less it has available to spend it self. To encourage people , firms and the banking system to buy government stock or bonds a government will rise interest rates. However higher interest rate may discourage other people from other people and firms from borrowing money to spend on consumption and investment. Therefore the rate of economic growth will be reduce. If taxes are to high, people and firms may reduce they work effort. This will reduce labor productivity , total output and profit as productivity falls, the cost of production will increase, and theywill be less able to compete on product price and quality against more producer overseas as a result, demand of their goods and aw fall and unemployment may rise. Consumer and producer in an economy may come expect a future rise in inflation following and expansionary fiscal policy. As a result, if there current government announced it will cut taxes and increase public spending to boost output and growth employee may push for higher wages now to protect them from an increase in their living cost. Rising wages will increase production cost and reduce the demand for labor, it may be caused inflation and rising unemployment .
ReplyDeleteThe problem of monetary policy is if government changes interest rate, bank rate, or currency of national currency there will be affect all sectors like price of good and services , the supplier, the production of goods and services. In some case policy aims might conflict. Measure to increase aggregate demand during an economic recession. Might rise output and unemployment in an economy but may boost consumer demand for import and therefore make the balance of international payment less favorable. Faster economic growth, may also create pollution and waste. Rising taxes or interest rate and cutting public expenditure to reduce price inflation by lowering total demand may result in lower output and more unemployment. In the same manner, policies that directly aim to redistribute income may also cause conflict.
To be concluded, because of policy conflict, if government doesn't run the policy wisely, policy can fail macroeconomics objectives, so government must think wisely how solve the macroeconomics objectives
Reference : economic notebook
Originality : 100%
First of all, there are 4 main macroeconomics objecties of the government in cotrolling an economy of a country. It includes low and stable inflation, high and stable employment, high and sustainable economic growth, and managing and stabilize the International trade – BOP. In order to achieve all of these objectives, government decided to create policies which is called the macroeconomics objectives which are the methods or tools through which government undertake, it includes demand side policies and supply side policies. Demand side policy instrument is divided into four, expansionary fiscal policy, contractionary fiscal policy, expansionary monetary policy and contractionary fiscal policy. Fiscal policy is the the policy undertaken by the government. It involves in varying the overall level of public expenditure and taxation in an economy to manage aggregate demand and influence the level of economic activity. While monetary policy is controlled by the central bank, and monetary policy deals with printing money. It involves changes in the money supply and interest rate in an economy to influence the level of aggregate demand and economic activity.
ReplyDeleteThere are two types of fiscal policy, expansionary fiscal policy and contractionary fiscal policy. Expansionary fiscal policy, the first objective is low and stable inflation, they can achieve this since they have low level of tax, the second objective of the government is high and stable employment. they can achieve this as they increase the aggregate demand in the economy. The third objective is high and sustainable economic growth, they have high level of employment, so they will have more output which can increase their expenditure and have high economic growth. The fourth objective is managing international trade, it means they have high MNCs, have high corporate tax, as the result they have high export. However, there are disadvantages that they might bring. Since they have low level of tax, it can reduce the total revenue of the government that they are using to improving public facilities. They will also increase the budget deficit, which means they will need more money to spend each year since they have low income from the taxation.
Contractionary fiscal policy, since they have high level of taxation, they can create inflation. A government have extra responsibilities for the health care and educational programs. These responsibilities need spending from the government, which result higher level of tax for the citizens. Oftentimes, government charge medium to large companies with the highest level of taxes(burden). This burden can also cause the middle to lower class citizens, higher cost of goods and services. The middle and lower classes find themselves are taxed indirectly, becasue the value of the money (price) is no longer equals with the value of goods or services that they are buying. They also have low level of aggregate demand and low level of public expenditure, so they will have lower output and high unemployment.
There are two types of fiscal policy, expansionary fiscal policy and contractionary fiscal policy. Expansionary fiscal policy, they can achieve low and stable inflation because they have low level of interest rate. Expansionary fiscal policy is often been used in the situation of high unemployment and have low level of economic growth. So this policy cannot achieve the the second and third objective of the government which is high and stable employment and high and sustainable economic growth.
ReplyDeleteContractionary fiscal policy, they have high level of interest rates and have low aggregate demand. This occurs when the economy level is overheating and inflation pressure are rising. This will result in lower level of output as they have high interest rate, so they should spend more money to produce products and have lower level of output as the result and they will have lower level of employment (more unemployment).
In conclusion, i do agree that both of fiscal and monetary policy instruments are likely be more danger if we not used it wisely, it can harm the country itself.
Vienetta christina 8a
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References :
1. http://www.life123.com/career-money/credit-debt/inflation/how-taxes-affect-inflation.shtml
2. Economics textbook
3. Economics notebook
Government has four major macroeconomic objectives they aim to achieve, which are low and stable inflation, high and stable employment, high and sustainable economic growth and managing and stabilizing international trade or balance of payments, meaning exports must be equal or more than imports. Government will use fiscal and monetary policies to achieve these goals. Fiscal policy is made by the government, which deals with government spending (public, merit goods, subsidies, financial incentives), revenue (taxes and fees), and debt or borrowing.
ReplyDeleteMonetary policy is created by the central bank, which deals with interest rates to control saving and borrowing. Fiscal policy can be expansionary or contractionary. Expansionary fiscal policy is used during recession to boost economic growth, while contractionary fiscal policy is used during prosperity to control inflation. Policies to control one objective may conflict with another objective.
In attempt of controlling inflation, the government may use contractionary fiscal policy by increasing tax rates to reduce the purchasing power of people. Increasing direct taxes will reduce disposable income, while increasing indirect taxes will increase costs of buying a product. Both increases will ultimately reduce aggregate demand. However, this is at the cost of employment because people are less motivated to work as they will earn less, and because of the decrease in aggregate demand, cuts in output and factors of production such as labour must be done. Therefore some underemployed workers may face redundancy. Economic growth will also be affected as for the reduction in aggregate supply. The country’s GDP may fall as a result. It will also negatively affect international trade, because the country has a deficit of goods to export. Rich people who are not affected by the increase in taxes would also demand more imports as a result of a reduction in the supply of local goods, therefore imports may increase while exports decrease. The government might also choose to increase economic growth by increasing the money supply of the country, so people will feel wealthier and will spend more. Increased money supply increases aggregate demand which will cause a rise in production output. Reducing interest rates can also cause economic growth, because people are able to take credit loans more easily, therefore more people can invest in new businesses and employ more people, increasing employment. However, the increase of economic growth by an increase of money supply and easier credits may cause high inflation. Money will lose its value and prices will go higher, so people can afford less goods. Easy credit can also cause dangerous situations if debtors cannot repay their debts. For example, one of the causes of the depression in 2007-2008 is the overconfidence of people and easy credits that could not be paid back. Reducing the tax rates may affect employment and economic growth, because more people will be motivated to work due to increased incomes. More businesses will also be set up to produce goods and services, which will increase the country’s GDP and increase economic growth. It may also lead to positive balance of payments if goods produced are exported. However, rapid economic growth will stimulate aggregate demand to grow too fast, and money supply to increase, while aggregate supply does not increase much. This will lead to inflation. Government would then try to take the money out of the economy by increasing interest rates to encourage people to save. The cycle will go on.
In contrast to the statement above, macroeconomic objectives can only be achieved when the appropriate policies are applied. Without fiscal and monetary policy, the country may fall into hyperinflation of deflation. Credit borrowings may be too high and the country will fall into a deficit. Countries without proper government intervention would most likely fall into market failure, because private sectors do not bother about producing goods and services which will not earn them profits. Controlling inflation is fairly successful when increased tax rates are applied to the rich and wealthy, so that they will not be able to purchase as much goods and services. Employment and economic growth will inevitably be affected, but the effect is much lesser if the rates are kept at a reasonable level. Increasing economic growth is vital to any country, so a small increase in inflation is fine, as long as it is controlled. Inflation gives people a feel-good feeling, because they receive a greater amount of income, although there is no real increase in actuality.
ReplyDeleteIn conclusion, government policies is very much like a double-edged sword. Applying a policy to achieve a macroeconomic objective often causes problems to another objective.
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There might be some problems in a country. Problems like traffics, corruption, inflation, murder, etc. are all dangerous. It can affect people’s harmony. That is the need of government is essential. There is 4 main objectives of government: reduce and stable inflation, high and stable inflation, balance of payment and international trade, and high and sustainable economy growth. To achieve these objectives, government needed some tools to do it. The tools are policies. Policies are divided in two parts they are: demand side policies and supply side policies. Demand side policies examples are fiscal policies and monetary policies. Government usually uses these policies. Supply side policies are selective tax incentives, selective subsidies, improving education and training, labour market reforms, competition policy, removing trade barriers, privatization, and regulation and deregulation.
ReplyDeleteFiscal policies and monetary policies bring an advantage to the country. First, is they control inflation by reducing inflation so that the goods is achievable to be bought. If inflation is not being controlled, there might be a chance that the disposable income decrease and poverty increase and also decrease in the purchasing power. So to control it is by increasing tax on high income people and giving subsidies to low income people or to pension. Next is to control employment, so that everybody could work and have enough working space or working opportunities for people. If it isn’t control, there might be a chance that the disposable income could decrease. The way to control it is making more MNC (Multinational Companies) come to the country. The way to make they come, is to lowering the tax to company. Next one is to make economic growth high and sustainable for everyone. And the last one is to make international trade balance. For example, the import and export need to be equal.
If policies such as monetary and fiscal policies are not being used correctly, then, there could be some problems. The first one is that economic growth can’t grow too much. Because the higher it grows, people will spend more money to buy goods and services, and if more people buy a lot, then prices will increase. The second is that if inflation is too low, there will be a high interest rate. And if this happens, then it will decrease consumer spending. The third one is that as soon as the economic growth increases, more people will exported goods rather than imported. Britain and American like to exported goods rather imported goods. Indonesians like to imported rather than exported. In the old days, balance of payment is one of the most important macroeconomics objectives, either the exchange rate would give, or import controls were used or the government had to deflate the economy, implying a low rate of growth. Next one is low unemployment and low inflation. This is the classic conflict in economic theory. If a government is trying to reduce unemployment using the method reflationary measure, then there will be a result of push wages, and the price will be high because of that. On the other hand, if government tries to reduce inflation by increasing interest rate, and decrease public spending, then the result is that people will lose purchasing power and low investment. People with low investment will lead to unemployment or job losses. Well, of course government doesn’t want this to happen. The fifth one is that if economic grow, then productivity will increase, technology will increase. If this happens, then pollution will occur because industry trying to make cars more. Next one is forcing equality throughout a country can lead to inefficiencies. If economic grow, poor people will got more foods than usual, but the rich people will also get even more. It happens because as days are gone, technology, The communist Soviet Union kept the more equality conscious socialist model going right into the 80s, but its inefficiencies meant that the rate of growth was much slower income are getting higher, and also the quality is getting higher because of technology advance.
ReplyDeleteSo we can conclude that if fiscal policies and monetary policies is being used correctly then, there will be no problem. That is why it is important to keep economic growth to be balance. If not, there could be some problems that I spoke above. The problems examples are that it is cumbersome to use, crowding effect, people will become disincentive to work, and expansionary policies is increase. In a simple way, fiscal and monetary policies can be effective to be used in achieving the four macroeconomic objectives by optimal fiscal and monetary policies
References:
Economic notebook
http://www.tutor2u.net/economics/content/topics/macroeconomy/government_policy.htm
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