National Economic Policy macroeconomic - Essay Example

Download file to see previous pages... This increase in money supply will lead to an increase in output, income and employment. This will be        caused by    the fall in interest rate which occurs after the LM curve shifts to the right (Young & Zilberfarb, 2000), as reflected in the IS-LM curve below. It is worth noting that if money supply is increased, while interest rate is held constant, a higher level of income is needed to ensure    that there is a corresponding demand level for money to the supply. This as mentioned earlier moves the LM curve to the right. The increased income and constant interest rate where the money demand and supply equal each other is seen at the far right of the curve. In case the inflation rate at one point of constant interest rate makes holding money costly, thus few decide to hold it. This calls for rising of income at a certain real interest rate in the universe so as to put the needed money to be held thus maintaining the economic equilibrium, which can be traced to the right of the IS-LM curve (Carlberg, 2000). The components of GDP will be affected as a result of applying this policy. First of all, the aggregate demand will increase. This increase in demand refers to the increase in the number of goods required by consumers in the economy. This is usually a very good thing for triggering an increase in output in the economy. Especially in the short run, this usually raises the production of the economy which is very desirable. This policy will also have a negative effect on employment. One of the reasons for the increased unemployment is the fact that producers react to the high demand by government thus taking production to a higher level. The increase in production demands that labor increases. The people who are hired earn money thus are able to spend in larger amounts than when unemployed. Question Two  Expansionary fiscal policy A variety of fiscal policies which leads to a rise in government spending, a shrink in taxes, or a swell in transfer payments is applied to counter the mishaps of economy contraction. The objective of expansionary fiscal policy is to bridge a recessionary gap, ignite the economy, and reduce the unemployment level. Expansionary fiscal policy is sometimes backed by expansionary monetary policy. Taxation Taxation is the major fiscal policy tool that works quickly to correct an ailing economy. Basically individual income taxes levied by the state; however other taxes are also applicable. Taxes are the spontaneous levies that the government charges on the entire the economy to create the proceeds required to provide basic goods and services and to facilitate other state functions. Personal income levies are precisely the taxes gotten from the earnings received by individuals in each house hold. Expansionary fiscal policy works by either a decline of the income tax levies or an instant rebate of levies previously collected. The decrease in taxes empowers the each household with extra per capita earnings that can be utilized for spending costs, which then ignites cumulative production and employment and translates ...Download file to see next pagesRead More