Introduction Poverty is a multidimensional problem that goes beyond economics to include, among other things, social, political, and cultural issues see Box 1. Therefore, solutions to poverty cannot be based exclusively on economic policies, but require a comprehensive set of well-coordinated measures. Indeed, this is the foundation for the rationale underlying comprehensive poverty reduction strategies. Because economic growth is the single most important factor influencing poverty, and macroeconomic stability is essential for high and sustainable rates of growth.
Education and training to help reduce structural unemployment. Geographical subsidies to encourage firms to invest in depressed areas. Lower minimum wage to reduce real wage unemployment. More flexible labour markets, to make it easier to hire and fire workers.
Demand side policies are critical when there is a recession and rise in cyclical unemployment. Fiscal Policy Fiscal policy can decrease unemployment by helping to increase aggregate demand and the rate of economic growth.
The government will need to pursue expansionary fiscal policy; this involves cutting taxes and increasing government spending.
Lower taxes increase disposable income e.
If firms produce more, there will be an increase in demand for workers and therefore lower demand-deficient unemployment. Also, with higher aggregate demand and strong economic growth, fewer firms will go bankrupt meaning fewer job losses.
Keynes was an active advocate of expansionary fiscal policy during a prolonged recession. He argues that in a recession, resources both capital and labour are idle. Therefore the government should intervene and create additional demand to reduce unemployment.
Also, people may not spend tax cuts, if they will soon be reversed. Fiscal policy may have time lags.
If the economy is close to full capacity, an increase in AD will only cause inflation. Expansionary fiscal policy will only reduce unemployment if there is an output gap. Expansionary fiscal policy will require higher government borrowing — this may not be possible for countries with high levels of debt, and rising bond yields.
In the long run, expansionary fiscal policy may cause crowding out, i. However, Keynesians argue crowding out will not occur in a liquidity trap. Monetary policy Monetary policy would involve cutting interest rates. Lower rates decrease the cost of borrowing and encourage people to spend and invest.
Also, lower interest rates will reduce exchange rate and make exports more competitive. In some cases, lower interest rates may be ineffective in boosting demand. In this case, Central Banks may resort to Quantitative easing. This is an attempt to increase the money supply and boost aggregate demand.
Evaluation Similar problems to fiscal policy.The government will need to pursue expansionary fiscal policy; this involves cutting taxes and increasing government spending.
Lower taxes increase disposable income (e.g. VAT cut to 15% in ) and therefore help to increase consumption, leading to higher aggregate demand (AD).
US and UK were more successful in reducing unemployment after /09 recession. Demand side policies are critical when there is a recession and rise in cyclical unemployment. (e.g. after recession and after recession) 1. Fiscal Policy Fiscal . Fiscal policy – changes to government taxation, government spending and borrowing; Supply-side policies designed to make markets work more efficiently; Objectives of UK Macroeconomic Policy.
The key objectives for the UK are: Stable low inflation - the Government’s inflation target is % for the consumer price index. Macroeconomic Objectives and Macro Stability. Levels: AS, A Level; Exam This is in the hands of the government. Supply-side policies can also be used to control inflation and promote growth over the longer-term.
Practically all governments apply macroeconomic policies to reach policy goals and to improve the workings of the economy. Economic growth is important for reducing poverty levels. Continued growth means the ability to meet the needs of the current generation without burdening future generations with debt (Macroeconomics). The government will need to pursue expansionary fiscal policy; this involves cutting taxes and increasing government spending. Lower taxes increase disposable income (e.g. VAT cut to 15% in ) and therefore help to increase consumption, leading to higher aggregate demand (AD). Three key issues are discussed in this section: (1) how to finance poverty-reducing spending in a way that doesn’t endanger macroeconomic stability; (2) what specific policies can be adopted to improve macroeconomic performance; and (3) policies to protect the poor from domestic and external shocks.
Rising living standards and a fall in relative poverty – cutting child poverty and reducing pensioner poverty. Sound. Economists look for macroeconomic policies that prevent economies from slipping into recessions and that lead to faster long-term growth.
Raising interest rates or reducing the supply of money in an economy will reduce inflation.
Inflation can lead to increased uncertainty and other negative consequences. Instead of buying government. MACRO-ECONOMIC| Discuss the role of government policy in reducing unemployment and inflation.
In your discussion make use of the diagrammatic representation of the macroeconomy developed in lectures in Term 2| Unemployment and inflation are factors that have negative effects on the performance of the economy as a whole.