• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

What problems may a government face in trying to fine tune the economy towards full employment?

Extracts from this document...

Introduction

A government uses demand management policies to raise the level of national income to full employment. Assuming an open economy with a government sector, analyse the policy options open to the government. What problems may a government face in trying to fine tune the economy towards full employment? When governments use demand management policies to raise the level of national income to full employment, it will usually involve the increase of government spending within the economy. Demand management policies are used when firms do not invest enough to create sufficient demand or if consumers do not spend enough to increase demand, thus a government have to step in and stimulate spending by using fiscal and monetary policy which is basically the manipulation of government spending to produce the desired effects, and involves different methods, as well as the deliberate manipulation of interest rates. Since we are dealing with an open economy with a private sector and imports and exports, the problems that face the government when this policy is put into practice are far ranging and in some cases, become long term problems, such as continual budget deficits. ...read more.

Middle

If this is a high amount, say 0.9, then a person will spend 90% percent of any increased income, so if there was a $100 million injection into the economy, $90 million of it will be spent. This income eventually is spent and becomes someone else's income, who will then spend 90% of that amount, which is $81 million. This will continue until nothing is left of that amount, but by that time, so much more than the initial $100 million will have been generated. This government spending would help overturn any leakages from the circular flow. The deflationary gap and the difference between Ye and Yf is shown here in this diagram: The deflationary gap is clearly smaller than the gap between Ye and Yf, and the gap is only bridged by spending the amount of the deflationary gap because of the multiplier effect. The actual formula for the multiplier is (change in income)/(change in government spending) or 1/1-MPC. A decrease in direct and indirect taxes will have very similar effects, as it allows consumers to have a greater disposable income. ...read more.

Conclusion

Governments would have don't this by forcing banks to buy certain government securities through the central bank and therefore leave banks with no money to lend. In the case or Argentina, they simply did not open banks so no money could be borrowed and spent. Nowadays, they merely change interest rates to influence consumers and investors. The fundamental difference which exists between Keynesian economists and monetarists is that the monetarists believe that the economy is self correcting, that a change in the interest rates will lead to greater spending without the help of the government, whereas Keynesian economists believe it is the duty of governments to stimulate spending in the economy by pouring money into the economy, and with the help of the multiplier, reduce any unemployment. There are still several factors that limit the use of fiscal and monetary policies though, such as an inability to keep the economy at a constant level. When the problems of high unemployment and low economic growth are solved, the problems of inflation and balance of payments deficits arose, and as soon as these issues were solved, the other pair becomes evident. This cycle means that there will usually never be a economy in a stable, immobile state. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Economy & Economics essays

  1. Retailing In India - A Government Policy Perspective

    Consumer research shows that households in metropolitan cities are gravitating towards supermarkets and other modern retail channels. On the supply front, a number of organized retailers have entered the trade in the last 5 years. These include large Indian business groups such as the Tatas, RPG, the Rahejas and Piramal, as well as MNC brands in apparel, footwear and durables.

  2. Use the multiplier to explain how an increase in any component of aggregate demand ...

    Therefore a long chain of additional income, spending and saving is established. The process will come to a halt when the additions to savings are �1000. This is because the change in savings is now equal to the original investment and therefore the economy is returned to equilibrium.

  1. Monetary policy of a globalised economy

    The tremendous increase in the share of national output devoted to imports and exports is one of the major parts of globalization. As a consequence of continuous drop in transportation and communication costs, along with declining tariffs and other barriers to trade the share of trade in the national output

  2. Recession, Tax Cuts and Budget Deficits.

    of a recession; current employment, current industrial production, real manufacturing and trade sales, and current real personal income less transfers. The start of the 2001 recession was marked by a slight decline in the current employment and a large decrease in industrial production compared to previous recessions.

  1. Chinese economy sets for soft landing in 2005.

    widely-anticipated interest rate rise, but analysts said yesterday they believed the bank was not hinting at any immediate action. The market has been anxiously awaiting signs of the central bank's judgment on the economy, especially after frenzied fixed investment and loan growth showed a faster-than-expected slowing down during the past couple of months.

  2. The Social Balance - The Mixed Economy.

    Public expenditure was dominated by defence in the eighteenth and nineteenth centuries. As late as 1910, a peace-time year, over 40% of government expenditure went on administration and defence - services of the public good variety. For such goods the costs, in terms of taxation, were more real and personal to most citizens than the benefits.

  1. Elements of Art. 81

    Metro v Commission). * Cf. also Ford (circular sent by the car manufacturer to its German dealers in which it suggested that it would not meet orders from them for right-hand-drive cars thus isolating markets in the UK and Ireland formed part of the contractual relations as an implied term)

  2. what are the problems of trying to compare living standards

    But as technology has improved so the productivty has increased therfore the quality has enhanced. The distribution of national income (i.e. levels of inequality). - Economic growth is measured by an increase in the real GDP per capita. There are a number of problems that should be considered if national

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work