Question

Describe a real government policy in the context of the macroeconomic principles ,the economic problem it attempted to tackle and the intended goals. Who were the agents pushing it forward? Who was against it? 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

During an deflationary level, govt. can adopt expansionary fiscal policy(lowering tax rates and increasing govt. spending) and central bank can have expansionary monetary policy ( lowering interest rates and increasing money supply ).

I would discuss expansionary fiscal policy. As explained above, this policy aims to drive economic recession out by increasing investments by govt. that leads to more jobs generation and more income for the people. It also reduces taxes so that disposable income with people and businesses increase they can invest more in markets. A healthy economy also aims to reduce social tensions. The agents pushing it forward will be banks, businesses, people. There will be a few economist who may fear price level rise and may oppose it by saying that market is free to correct itself effectively and efficiently.

Govt. through this policy aims at making people happier and reduce economic tensions that may create trouble and may not reelect incumbent govt. Following stakeholders are affected due to this policy:

Govt.: They have to put money in the markets and this leads to fiscal deficit and govt. credibility goes down if fiscal deficit increases.

Businesses: Tax reduction makes them better off but they may fear future taxcincrease.

Common people: They may feel better when more jobs are generated but fiscal deficit may increase indirect tax and burden may be more on poor people.