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. Therefore, policies to achieve low and stable price inﬂation, a high and stable level of employment are big macroeconomics issues of our time. This essay focuses on discussing the role of government policy on reducing unemployment and inflation in relation to Keynesian and Monetarist approaches, including examples of impacts of expansionary fiscal and monetary policies on New Zealand economy. Fiscal policy is a demand side policy used by the government to help direct the economy by altering the level of expenditure and/or rate of taxes. Expansionary fiscal policy refers to increase government expenditure or a lower tax in order to inject into or withdraw from the circular flow of money respectively, this results a raise in aggregate demand and thus national income. On the other hand, deflationary (contractionary) fiscal policy is used by the government as a tool to control the pressures of inflation by reducing expenditure or increasing taxes, which thus reduce aggregate demand and preventing excessive inflation. Fiscal policy is used by Keynesians to increase/decrease public expenditure and cut/increase taxes during a recession/boom. When they decrease taxes and increase public expenditure, it encourages people to spend, thus raise consumer expenditure. This contributes the reduced unemployment (due to the increased public spending creating more demand and more jobs to increase the supply of goods and services), but an increased inflation (due to the increased spending and wage demands). On the other hand, when Keynesians use fiscal policy to increase taxes and reduce public spending, they cause higher levels of unemployment and lower...
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