• 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 ...

    If a firm decides to construct a new building costing �1000, then the income of the builders and suppliers of the raw materials will increase by �1000. However, the process continues, if it is assumed that the recipients of the �1000 have an MPC of 2/3, they will spend �666 and save the rest.

  1. Recession, Tax Cuts and Budget Deficits.

    The figure below shows the decrease in industrial production after mid 2000. Current Industrial Production The dark line shows the movement of industrial production in 1999-2001 and the dashed line the average over the past 6 recessions. Another method to determine when the economy is in a recession is to look at the U.S GDP.

  2. Chinese economy sets for soft landing in 2005.

    managing its economy to a soft landing remains at a critical juncture and any let-up in policy restraint may risk losing ground already gained in the campaign, the central bank warned yesterday. Similar rhetoric by the bank last month cautioning about the difficulty in macro management refuelled speculation about a

  1. 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

  2. Free essay

    business aims

    if the business gets a good reputation it will help to attract and retain customers. Also with a good reputation it makes it easier to recruit new employees and can improve employee motivation. In the past the business has had a reputation of having bad and out of date food.

  1. An Empirical Investigation into the Causes and Effects of Liquidity in Emerging

    3.3 How to measure liquidity? Sarr et al. (2002) explain that liquidity measures classify into four main categories: (i) Transaction cost measures that capture costs of trading in the financial assets and any frictions in the secondary markets. (ii) Volume-based measures look at the volume of transactions rather than price

  2. The Famous Grouse - company profile and exports

    The economy is marked by steady growth, low unemployment and inflation, and rapid advances in technology. US Economy The US has the largest and most technologically powerful economy in the world, with a per capita GDP of $37,800.

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