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Economics Policies

Economics Policies. Alex T. Zhao, Marcus Lee, Jason Jeong , Mervin Law. Divided into two big groups. Demand Side Policies Increase/decrease AD AD = C + G + I + Xn. Supply Side Policies—Aimed towards increasing quantity and quality of FOP, and improve incentives. Demand Side Policies.

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Economics Policies

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  1. Economics Policies Alex T. Zhao, Marcus Lee, Jason Jeong, Mervin Law

  2. Divided into two big groups • Demand Side Policies • Increase/decrease AD • AD = C + G + I + Xn • Supply Side Policies—Aimed towards increasing quantity and quality of FOP, and improve incentives

  3. Demand Side Policies • Fiscal Policies • Two TOOLs: • Government Spending and Taxes • Expansionary Fiscal policy • Increased Gov. Spending • Multiplier effect • Decreased taxes • Influence C and Inv. (Promote spending) • Contractionary Fiscal Policy • Dec. Gov Spending • Increase Taxes • Monetary Policies • TOOL: Interest rates (controlled by the Central Reserve not the government) • Easy Monetary • Lower interest rates • Affect C and I and Xn. • Exchange rate depreciate exports more competitive • Tight Monetary • Increase interest rates

  4. Demand Side Policies (cont.) • Multiplier effect • Increased government spending becomes people’s income, which lead to more spending, generating a multiplier effect such that the final increase in AD is greater than the initial government spending

  5. Demand Side Policies (Cont.) • Automatic Stabilizers • Involves Progressive Tax system and unemployment benefits • Eg: Bad economy  Less Real income  Less tax collected (due to progressive Tax system) and more unemployment benefits (government spending)automatic stabilization.

  6. EVALUATION (Demand Side • Fiscal • Direct • Automatic Stabilizers • Effective in recession (when monetary policy is not effective since interest rate approx. 0) • Multiplier effect • Time lags • Large Deficit spending  national debt • Inflationary pressures • Crowding Out effect • Indiscriminate spending  just to get re-elected? • May lead to wide trade deficit (higher income, more imports) • Contractionary fiscal policy against inflation is hard to execute. • Not flexible  can’t stop the building of a bridge! • Monetary • Considered very flexible • Interest rate can be altered gradually or incrementally • Easily reversed if all goes to **** • C Does not only depend on interest rates • Does not work well in deep recession • Time lag  shorter than fiscal but still exists • Fixed exchange rate system  not effective (constrained to using interest rates to maintain fixed exchange rates_ • Global financial markets  weaken effectiveness of domestic monetary policy.

  7. Supply Side Policies • Review: Aimed towards increasing quantity and quality of FOP, and improve incentives

  8. Supply Side Policies (Cont.) • Market Based (little or no government intervention) • Product Market Based • Labor Market Based • Incentive Based • Interventionist Supply Side (government intervention

  9. Supply Side—Market Based • Product Market Based • Deregulation (reduce health and safety regulations • Privatization (improve competition and efficiency • Trade Liberalization—decrease domestic monopoly power • Incentive Based: • Lower income tax (more incentive to work harder?) • Reduction in Corporate Taxes (more profit) • Labor Market Based • Legislation against trade unions • Reduce unemployment benefits • Reduction/elimination of minimum wages • Reduce non-wage labor costs • Making hiring and firing easier • Making pension plans transferable across occupations (Labor mobility increases)

  10. Supply Side--Interventionist • Investment in Human Capital: Education and Training to increase efficiency and productivity • Research and Development (new technologies) • Provision and maintenance of infrastructure • Note: Infrastructure—large scale capital necessary for economic growth • *Note: Also imply increase of AD in the short run (due to increased government spending* • Direct support for business/industrial policies (subsidized low interest rates, tax breaks, tax allowances, and protection from foreign competition.

  11. EVALUATION (Supply Side) Advs. • Lowered inflation • Increased employment • Improved sustainable rate of economic growth by increasing AS • Increased level of competition and efficiency • Fewer distortions to the price mechanism • Increased flexibility in labor markets • Fewer built in disincentives Disadvantages (market based) • Benefits take long time to materialize effective in long run, not short run • Tax cuts leisure and less labor investment, further skewing an inequitable income distribution • Privatization  unemployment (short run) • Deregulation may be unsuccessful • Lead to increased income inequality (lack of benefits)  economic and social costs in the future. Disadvantages interventionist • Opportunity cost • Distorted product markets • Distorted labor markets (inefficient, inequality)

  12. For more info.Wow that was a long presentation ZZZZZZ… • http://www.economicshelp.org/macroeconomics/economic-growth/supply-side-policies/ • http://www.slideshare.net/ajmccarthynz/34-demand-and-supply-side-policies • Study guide pages 98--109 • http://theinvisiblehand.wikispaces.com/file/view/Aggregate%20Supply.IB.2012.pdf/325375442/Aggregate%20Supply.IB.2012.pdf

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