Question

Government regularly uses fiscal and monetary policy in an attempt to influence the economy.

Discuss a recent fiscal policy employed by the government.

Describe, using economic theory from the module and your own research, how that policy is expected to affect the economy.

Discuss how crowding out may alter the actual effect of this policy.

Answer 1

Answer)

1) Unemployment rate is the ratio of unemployed people and labor force. It plays a significant role for the growth of economy, Lower the unemployment rate, higher will be the economic growth. During the period of economic recession, Unemployment rate will be high.

Impact of unemployment on the economy:

a) Less government revenue: Increase in unemployment rate means people are unemployed and earning no income which implies they are not paying income tax to government. This leads to decrease in the government revenue from taxation, which will affect the development of the economy.

b) Low demand of goods and services: Since people in the economy are unemployed so they have no income to demand goods and services, which leads to GDP of nation falls.

c) Lower standard of living: People who are unemployed find it very difficult to live a healthy life, so standard of living will fall.

2) Higher GDP(Gross Domestic Product)

To measure the progress of economy, GDP is used. If GDP is rising, it is good for the economy as the output will also increase no need to import goods but can export as it will help in maintaining the payments.

If GDP is falling, It is bad for the economy. If the inflation rate increases, it will affect the GDP as well and this issue will only be controlled by monetary policy.

3) Lower the national debt

Lower the national debt, Lower wil be the economy to grow. Lack of government spending in the economy which leads to economic slowdown

Government debt leads to economic slowdown as when government debt increases, interest rate will also increases,as less money will be invested by private investors. Hence, high government debt reduces private investment in the economy.