Chapter 14 discusses various g

Chapter 14 discusses various government ‘policylevers’ that past and current presidents have used to bring aboutsome desired economic result (help unemployment, reduce inflation,etc.). Discuss one or more that you feel wereeffective or interesting?

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Various government ‘policy levers’ that past and currentpresidents have used to bring about some desired economic result(help unemployment, reduce inflation, etc.). Discuss one or morethat you feel were effective or interesting

A) Unemployment

The unemployment rate is a vital measure of economicperformance. A falling unemployment rate generally occurs alongsiderising gross domestic product (GDP), higher wages, and higherindustrial production. The government can generally achieve a lowerunemployment rate using expansionary fiscal or monetary policy, soit might be assumed that policymakers would consistently target alower unemployment rate using these policies. Part of the reasonpolicymakers do not revolves around the relationship between theunemployment rate and the inflation rate.

Two other sources of variation in the rate of inflation areinflation expectations and unexpected changes in the supply ofgoods and services. Inflation expectations play a significant rolein the actual level of inflation, because individuals incorporatetheir inflation expectations when making price-setting decisions orwhen bargaining for wages. A change in the availability of goodsand services used as inputs in the production process (e.g., oil)generally impacts the final price of goods and services in theeconomy, and therefore changing the rate of inflation.

The natural rate of unemployment is not immutable and fluctuatesalongside changes within the economy. For example, the natural rateof unemployment is affected by changes in the demographics,educational attainment, and work experience of the laborforce,institutions (e.g., apprenticeship programs) and publicpolicies (e.g., unemployment insurance); changes in productivitygrowth and contemporaneous and previous level of long-termunemployment

There are two main strategies for reducing unemployment –

  • Demand side policies to reduce demand-deficient unemployment(unemployment caused by recession)
  • Supply side policies to reduce structural unemployment / (thenatural rate of unemployment)

A quick list of policies to reduceunemployment

  1. Monetary policy – cutting interest rates to boost aggregatedemand (AD)
  2. Fiscal policy – cutting taxes to boost AD.
  3. Education and training to help reduce structuralunemployment.
  4. Geographical subsidies to encourage firms to invest indepressed areas.
  5. Lower minimum wage to reduce real wage unemployment.
  6. More flexible labour markets, to make it easier to hire andfire workers.

B) Reduceinflation

  • Governments can use wage and price controls to fight inflation,but that can cause recession and job losses.
  • Governments can also employ a contraction monetary policy tofight inflation by reducing the money supply within an economy viadecreased bond prices and increased interest rates.

Below is the summary of policies to reduce inflation

  • Monetary policy – Higher interest rates. Thisincreases the cost of borrowing and discourages spending. Thisleads to lower economic growth and lower inflation.
  • Tight fiscal policy – Higher income tax and/orlower government spending, will reduce aggregate demand, leading tolower growth and less demand-pull inflation
  • Supply-side policies – These aim to increaselong-term competitiveness, e.g. privatization and deregulation mayhelp reduce costs of business, leading to lower inflation.

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