Question

Analyze a real government policy in the context of the macroeconomic concepts we learned in class. Describe the economic problem this policy attempted to tackle and the intended macroeconomic goals.Explain who were the agents pushing this policy forward. Who opposed the policy? What was the incentive framework of the main agents involved before the policy was implemented? And what was the incentive framework implied by the policy? You must be able to identify groups of people with similar background or interests and compare the economic policy from the viewpoint of these groups.

You are free to choose any government policy that is interesting to you: fiscal policy, monetary policy, or regulatory policy.

Answer 1

We will discuss about the FISCAL POLICY. Fiscal Policy is implemented by the FEDERAL GOVERNMENT and FINANCE MINISTRY to tackle the problems of INFLATIONARY GAP and DEFLATIONARY GAP i.e., INFLATION and DEFLATION in the economy.

This policy used 2 main tools namely:-

• TAXES
• GOVERNMENT SPENDING

During inflation, government increases taxes which reduces the disposable income with the people which reduces their consumption and reduces AGGREGATE DEMAND by the amount of reduction of consumption & decreases government spending which reduces AGGREGATE DEMAND as it is also a component of the AD. The buyers will be the most affected as their income decreases by increase in taxes and reduction in government expenditure may also mean loss of jobs of people who may work in infrastructure development and other related areas.

During deflation, government decreases taxes which increases the disposable income of people which increaes their consumption and increases AGGREGATE DEMAND by the amount of rise in comsumption & increases government spending which increases AGGREGATE DEMAND as it is also a component of AD. The suppliers and investors are affected the most as the money has less value as compared to before as value of investments fall and goods become cheaper making it unattractive and less profitable for sellers to produce and sell goods.