Policy issues – role of fiscal, monetary, supply-side policies in promoting economic stability, growth and international competitiveness

Government can achieve short run, long run or stable economic growth by using fiscal, monetary and supply-side policies. 

Short run.

A government can increase AD and AS in the same time. Fro instance, a lower interest rate is likely to stimulate not only consumption but also investment. Higher investment will increase AS. Increases in some forms of government spending (for example, spending on education and research and development) will also shift the AS curve to the right.

Long run.

In case with long run economic growth the most important thing is AS (increasing in AS). To achieve the AS curve shifting to the right a government uses supply-side policy. For, example raise investment will increase AS. To extant production and use capital efficiency, it is important to have educated and healthy workers. Investment in human capital ( education, training and experience that a worker, or group of workers, possesses) should increase the productive capacity of the economy. However, all this changes should be done in the most effective ways.

Stable growth.

Actually, stable economic growth is the main aim of  government. Governments try to avoid AD increasing faster than the trend growth rate permit, because this can result inflation and problems with balance of payments. The government try to AD rising more slowly that AS.

 

The balance of payments (international competitiveness)

There are two ways, in which  government can improve the balance of payments: short run and long run.

In short run it is more likely to use demand-side policies (fiscal and monetary). In this case, there are three main ways a government can try to raise export revenue and reduce import expenditure in order to correct a current account deficit.

-          Exchange rate adjustment. To make national products more competitive on the international market a government can reduce the exchange rate by using monetary policy (emission of money).

-          Deflationary demand management. To reduce expenditure on import government can use fiscal and monetary policies. Domestic spending may be reduced by higher taxation, lower government spending and higher interest rates.

-          Import restrictions. Government can reduce expenditure on import by imposing import restrictions including tariffs (a tax on import) and quotas (a limit on imports).

 

In long run view government uses supply-side policies. A government may give subsidies to infant industries in the belief that they have the potential to grow and become internationally competitive. Government also can increase spending on education, etc.