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Macroeconomic policies - Coggle Diagram

- - - - used to stimulate the economy
      - increasing government spending and decreasing taxation
      - in short term has negative impact on the government budget as revenue decreases and government spending increases; in the long run people earn and spend more money (increasing tax revenues) and there is less need for government expenditure
    - - used to reduce the level of economic activity
      - decreasing government spending and increasing taxation
      - with a positive impact on the budget in the short run and negative impact on the long run
  - - - government expenditure can help boost investment in the economy
      - low rates of corporation tax attracts foreign direct investment (FDI) into the country, boosting the economy's potential output
      - decrease in taxes boosts economic activity (increase in disposable income/ prices seem to be lower), which increases spending, production and economic growth
      - taxes collected help fund government spending on products which fuel economic growth
    - - The use of expnasionary fiscal policy, i.e. cutting taxes and increasing government spending, can boost the levels of consumption, investment and therefore demand, which incentivises firms to increase their production. To meet these levels of production firms will employ more people, reducing the overall rates of unemployment. This is particularly effective with structural and cyclical unemployment as both were caused by a reduction in demand
- - - - low interest rates decrease the cost of borrowing, increasing consumption and investment --> economic growth
      - low interes rates decreases the rate of return from savings therefore decreasing savings and encouraging spending
      - low interest rates increase the disposable income availabel to people with loans, increasing consumption and therefore economic growth
      - increasing the money supply by allowing commercial banks to lend more money out (instead of depositing money in the central bank) will increase consumption and investment expenditure, increasing economic growth
    - - Lowering interest rates reduces the cost of borrowing and makes saving less profitable, thus encaouraging people to spend and invest. The increase in spending and investment increases the overall demand for goods and services in an econonomy, which therefore incentivises firms to produce more to earn higher profits. To increase their production firsm will have to employ more labour, increasing the levels of employment.
      - The increase in the demand for labour shifts the demand curve to the right, increasing the wage rates and motivating more people to wrok, which also reduces unemplouyment
- - - - the increase in productive capacity will increase economic growth
      - an increase in education and training increases the skills, productivity, flexibility and mobility of labour, increasing its productive capacity
      - government can directly provide education; incentivise the production of training schemes in private firms; increase spending on education (to monitor quality standards of teaching)
      - by reducing the power of trade unions, reducing unemployment benefits, reducing minimum wages more people will be encouraged to work increasing the quantity of labour and resulting in economic growth
      - introducing lower direct taxes increases the incentive to work as you can get to keep a greater poriton of your income, which increases the disposable income, consumption and therefore economic growth
      - introducing derregulation, i.e. reducing/ removing barriers to entry in order to make markets more competitive as an increase in competition results in lower prices, higher quality and greater efficiency; thus increasing economic growth
      - increasing incentives to invest (by decreasing corporate taxes or increasing subsidies or decreasing the amount of regulation [which attracts invests] ) increases the productive capacity leading to economic growth
      - privatisation makes firms more efficient as they are motivated by profit, which increases the competition and productive capacity of the economy, hence increasing economic growth
    - - Supply side policies are particularly effective if the reduction in employment is caused by supply factors, therefore it's helpful to reduce frictional unemployment.
      - The government can invest in education and training to help the unemployed gain skills to find employment in specific industries.
      - The government may reduce the power of trade unions. This way their bargaining power will decrease and they will not be able to push higher wages. This will maintain the number of people employed in firms, because usually an increase in wages results in less people being employed, as firms are not willing to increase their costs of production.
      - The government may also reduce welfare benefits to encourage unemployed people to actually search for jobs to not rely on welfare benefits. This way more people will actually find jobs because they will need the money to live.
      - The government may also incentivise or subsidise employment to firms in areas with high unemployment. Subsidies reduce the cost of production encouraging the firms to move their production to areas with low employment and employ more people.
      - While supply side policies tend to have more permanent impacts on employment, these effects take longer to achieve when compared to demand-side policies aimed at reducing unemployment in the economy