Question

Expenditure-changing policy,and expenditure-switching policy:Discuss what it is and give example of each policy

Answer 1

In an open economy, policymakers always focus on two goals of stabilising the macroeconomy, viz. internal balances and external balances.

A state in which the economy is running at a level maintaining the full employment of a country’s resources and price level of goods is stable is known as internal balance. It is a state relating to the internal conditions of the economy due to its domestic policies.

A state in which current account of the economy is maintained at balance, i.e. neither surplus nor deficit is known as an external balance. In this state, the difference between exports and imports (net export) is zero or close to zero.

These two goals are achieved with the help of two important policies of the economy which are

1. Expenditure changing policy; and
2. Expenditure switching policy.

Expenditure changing policy: This policy is the form of fiscal and monetary policies. This policy aims at maintaining or equating domestic expenditure and production.

Example: If the domestic expenditure is to be decreased tax rates are increased to decrease the purchasing power of consumers in order to decrease their spending power

Expenditure switching policy: This policy focuses on balancing the expenditure of an economy on foreign and domestic goods. It balances a country’s current account by managing the amount of expenditure of an economy on domestic and foreign goods. These policies influence domestic people to purchase more of domestic goods and less of imported goods and increasing the aggregate demand of foreign customers for the domestic product.

Example: Imposing tariff reforms i.e. imposing tariffs on foreign goods to increase their prices which decreases their demand and promote the domestic market of the economy.