Question

Discuss 3 specific policies that could be used to increase economic growth and the standard of living

Answer 1

The most common method for controlling economic growth is monetary policy. The Central Bank (or government) can cut interest rates to boost AD. Lower interest rates minimise borrowing costs, promoting consumption and spending by customers. The desire to invest is also diminished by lower interest rates, which instead makes borrowing more enticing. Higher interest rates would also decrease mortgage interest premiums, raising household disposable income.

The Central Bank can need to follow more unorthodox forms of monetary policy in a liquidity trap, where lower interest rates struggle to raise demand. To hold bond yields down, quantitative easing means growing the money supply and purchasing bonds. The hope is that the rise in the money supply and lower interest rates would improve demand and economic growth. The concern is that rising the supply of money could cause inflation. Evidence from 2009-12 shows, however, that the inflationary effect was low. The recession was likely to be worse without quantitative easing, but QE alone struggled to return the economy back to a normal growth forecast.

By lowering taxes and increasing government spending, the state will raise demand. Lower taxation on wages will raise disposable income and support consumer expenditure. Higher government spending would generate jobs and provide an economic boost. The concern with expansionary fiscal policy is that it leads to an increase in borrowing from the economy. The government needs to borrow from the private sector to fund this additional investment. If the economy is still rising, so the private sector will be squeezed out by greater government spending. Many who fear it is an excuse to indefinitely expand the scale of the government sector often condemn expansionary fiscal policy.