SAJC 2024 Macroeconomic Policies to achieve growth Lecture Notes Students

ST ANDREW’S JUNIOR COLLEGE JC2 H2 ECONOMICS 2024 Overview of Macroeconomic Policies and Policies to tackle slow/negative economic growth In your previous set of lecture notes, we looked at the first of the four macroeconomic goals – sustainable and inclusive economic growth. We learnt why governments would want to achieve this goal and broadly what causes economic growth to happen. In this set of notes, we will explore in depth how governments can achieve this macroeconomic goal. When countries are experiencing undesirable economic growth – persistently low or negative, unsustainable, non- inclusive growth, what policy options are available to governments to correct this? We will start off by exploring the various tools a government has before zooming in on how these policies can be applied to achieving the goal of sustainable economic growth. The first section of the notes is thus crucial for you to understand the different policies. Important concepts and tools and analysis  Discretionary fiscal policy  Government budget surplus and deficit  Monetary policy centred on exchange rates  Monetary policy centred on interest rates  Supply side policies Key questions to consider 1. What policy tools does a government have to achieve the 4 macroeconomic goals? 2. What is discretionary fiscal policy? 3. How is fiscal policy related to the government’s budget? 4. How does fiscal policy help to achieve economic growth? 5. In what circumstances is the use of fiscal policy better than the use of other macroeconomic policies? 6. What is monetary policy centred on interest rates? 7. How does monetary policy centred on interest rates achieve economic growth? 8. In what circumstances is the use of monetary policy better than the use of other macroeconomic policies? 9. What are exchange rates? 10. How is the price of one currency in terms of another determined? For example, Singapore Dollars in terms of British Sterling Pound? 11. What is monetary policy centred on exchange rates?

St. Andrew’s Junior College Economics Department 2024 2 12. How does monetary policy centred on exchange rates achieve economic growth? 13. In what circumstances is the use of exchange rates better than the use of other macroeconomic policies? 14. What policy tools are available to a government to influence the aggregate supply? 15. How do market-oriented supply-side policies achieve economic growth? 16. How do interventionist supply-side policies achieve economic growth?

St. Andrew’s Junior College Economics Department 2024 3 Contents 1. Macroeconomic Policies ................................................................................................................................................... 6 1.1. Types of Macroeconomic Policies ......................................................................................................................... 6 1.2. Demand-side policies .............................................................................................................................................. 7 1.2.1. Expansionary Demand-Side Policy .................................................................................................................. 7 1.2.2. Contractionary Demand-Side Policy ............................................................................................................... 8 1.3. Supply-side Policies ................................................................................................................................................. 9 2. Fiscal Policy ...................................................................................................................................................................... 10 2.1. Tools of Fiscal Policy ............................................................................................................................................. 10 2.1.1. Government Spending ..................................................................................................................................... 10 2.1.2. Taxes ................................................................................................................................................................... 11 2.2. Discretionary Fiscal Policy .................................................................................................................................... 12 2.2.1. Expansionary Fiscal Policy ............................................................................................................................... 12 2.2.2. Contractionary Fiscal Policy ............................................................................................................................ 12 2.3. The Government Budget ....................................................................................................................................... 12 2.3.1. Budget Positions ................................................................................................................................................. 12 2.3.2. Financing Budget Deficits ................................................................................................................................. 13 2.4. Expansionary Fiscal Policy to Achieve Economic Growth ............................................................................... 14 2.4.1. Government Spending ..................................................................................................................................... 14 2.4.2. Taxes ................................................................................................................................................................... 15 2.5. Benefits of using Fiscal Policy to Achieve Economic Growth ......................................................................... 15 2.5.1. Increase in Government Expenditure and its Effect on Aggregate Supply .......................................... 15 2.5.2. Decrease in Direct Taxes and its Effect on AS ............................................................................................ 16 2.6. Limitations of Fiscal Policy .................................................................................................................................... 17 2.6.1. Crowding-out effects ........................................................................................................................................ 17 2.6.2. Fiscal Sustainability ........................................................................................................................................... 18 2.6.3. Time Lags ............................................................................................................................................................ 19 2.6.4. Accuracy of Forecasts ....................................................................................................................................... 20 2.6.5. Small multiplier size .......................................................................................................................................... 20 2.6.6. Choice of fiscal policy tool: Increase in G or decrease in T ..................................................................... 20 2.6.7. Inflexibility .......................................................................................................................................................... 21 2.6.8. Method of financing........................................................................................................................