The Spanish economy is suffering from a recession with high unemployment and low growth. Discuss demand-side policies which you think the government should adopt to get the economy into recovery.
Due in by Wednesday the 5th of December. Minimum of 250 words.
Please discuss the policy carefully giving examples and making sure you make reference to any conflicts or problems in the policy.
Here are some notes to help.
Mr Wickham.
Demand side policies try to influence the growth/increase or fall/decrease of aggregate demand (total demand which is made up of consumer spending, government spending, investments and taxation). It uses taxation or by influencing the demand for money through the rates of interest.
ReplyDeleteIt can influence aggregate demand in two ways: either by fiscal policy or monetary policy. There is the expansionary fiscal policy which is increasing spending and cutting taxes to boost total demand, output or employment. And Contractionary fiscal policy, this would be used to decrease demand In order to reduce inflation. This would be done by cutting spending and increasing taxation.
But there are some problems with the fiscal policy. The governments do not adjust the taxation very well causing the economy to go into demand-pull inflation if spending get too high. They also borrow money from the private sector to finance its spending. If taxes are raised too high it will cause people to not want to work as hard and causes lower productivity and output. The other way around too increasing costs makes firm less competitive and more expensive to run.
The Spanish economy is now in recession and inflation is high. They should try to decrease interest rates this would cause more borrowing but on the other hand if they increased them I’m not sure it would encourage them to save more since they need all their money to pay for basic food stuffs. So the government should increase spending and cut taxes in order to boost aggregate demand, output and employment!
The Government influences the economy by the fiscal policy. Fiscal policy is the policy which regulates the government’s spending and taxation in order to achieve it’s aims. It has demand-side and supply-side policies. Supply-side policy influences the aggregate supply, which will result in the levels of employment and economic growth. Demand-side policy influences aggregate demand, increase or decrease for different aims.
ReplyDeleteOne type of demand-side policy is the Expansionary Fiscal Policy, which increases aggregate demand, output and employment in the economy by increasing it’s spending and decreasing taxes. This can make the economy grow up but it has a negative side: the government can be in deficit as a result of expansionary fiscal policy, if spending exceeds the revenue from taxes. This is called the Budget Deficit and usually governments borrow money to pay for this difference.
Another type is contractionary fiscal policy. It is the opposite, cutting spending and increasing taxes in order to reduce aggregate demand for some reasons, usually to reduce inflation (demand-pull inflation).
One of the ways to use the demand side policy is by changing interest rates in the bank. Change in interest rates in the bank will mean change in interest rates in commercial banks. If it rises people borrow less and save more, which means less goods and services are bought and so the agggregate demand falls. Also it can rise as a result of fall in interest rates.
However fiscal policy is not ideal, it has some problems as it caused problems to USA in the 70s and 80s when the inflation rose up to 25%. One of them is that it is not very accurate, the government find it difficult to know how much adjust spending and taxation in a recession or boom, e.g. over-spending can lead to demand-pull inflation. Another problem is such thing “crowding out”, when the government borrows money from the private sector by selling bonds (they receive money and pay back after a certain time with percentage interest) and so the money is no longer available to be
Used in the private sector. Next problem is that it might have negative affects, for example fall in demand will affect businesses and they are more likely to fall and so unemployment rises. The last one is that if the government is running expansionary fiscal policy then people will know about it and decide to push prices up before the inflation came, so it is cost-push inflation and unemployment can rise.
Living with these problems governments have adopted some fiscal rules to help with these problems. One of the rules is to manage Current and Capital accounts separately, so that the costs and benefits of long-term capital investments (e.g. schools, street-lights) can be easily identified. Second rule says that the government should borrow money only to pay for public investment, not on public sector wages and expenses. The third rule says that the public sector debt should stay on a low, stable level so that it is not going to become a big problem.
Another type of demand-side policy is monetary policy. It involves printing money, the interest rates charged (so the price of money), the supply of money. The supply of money regulates not by printing money but by attractive long-term, short-term bank deposits. The government regulates the monetary policy by using the central bank. The commercial banks will not want to charge their interest rate lower than in central bank because it is not going to give any profit and not way too high because in that case the demand will be too low for borrowing money. The rate the central bank set up is called base rate.
ReplyDeleteIn Spanish economy it should use the expansionary fiscal policy because it is going to increase the aggregate demand in the economy and so it is going to help from low economic growth because the increased aggregate demand is going to help businesses so stimulation for the economic growth and also more and more businesses means less unemployment. However, it can cause problems with demand-pull inflation and the government’s budget.
The Spanish government could put interest rates down so that the demand for currency fall, the currency itself fall and the demand for exports will increase but it can lead to inflation.
Governments have policies which they can use to influence the economy. There are two main policies the government use, Supply side and demand side.
ReplyDeleteDemand side policies are used to influence the level aggregate demand.It does this by controlling its spending and taxation (Fiscal policy). Or by influencing the demand of money through the Rate of interest and the supply of money (Monetary policy).
Supply side Policies are used to influence the aggregate supply (Productive output of the economy) which will result in employment and growth. the policies aim to stimulate work incentives and increase output. The government does this by using Tax incentives, Subsidies, Education and Training, Labour Market reforms, Competition policy, Free trade agreements, Deregulation and Privatization.
Fiscal policy has two types contractionary and expansionary fiscal policy. Expansionary fiscal policy usually means that the government is running a budget (the money a government has to spend from taxes) deficit. Expansionary Fiscal policy is used to increase aggregate demand by increasing government spending and reducing taxes.
Contractionary fiscal policy is used to decrease aggregate demand by decreasing spending and increasing taxes so the government can regain revenue to pay off debts. This is also used to reduce inflation.
The Fiscal policy has rules which are current and capital expenditures are handled separately, Governments should only borrow to pay for public investments and Public sector debt should be kept at a low and stable level.
Fiscal policy also has been argued that in the past it had not worked. The problems are that it does not have an accurate enough policy as in that it does not have an accurate amount of how much spending and taxation should be reduced or increased, It has also affected in the past the spending of private sector to suffer and has also affected the work incentives due to increase in taxes.
Monetary policy is used to control the demand of money. It controls the supply of money by providing short and long term deposit options as a way of keeping money away from the economic system. The government controls the demand of money by making the central bank change the interest rates since the central bank is the bank of banks.
Increasing interest rates is contractionary monetary policy and decreasing interest rates is expansionary monetary policy.
The supply side policies aim to boost supply to increase outputs, employment and growth.
The supply side policies are Tax incentives which is used to make workers and firms incentives to change. Subsidies are grants of money used to stimulate or protect productive activity. Education and training is provided by the government to make people more skilled for a modern world. Labour market reforms is the government taking control of the power of trade unions. Competition policy is the government removing barriers to increase competition. Free trade agreements are removing barriers and free trade which benefits consumers because the cost of goods and services decrease. Deregulation which is removing or simplifying old, unnecessary or over complex rules and regulations. Privatisation involve transferring public firms into private firms.
Spain should use contrctionary fiscal policy to reduce inflation and to regain revenue to pay off debts but they can use expansionary fiscal policy to build public firms for example hospitals to create jobs and decrease unemployment. But i think that Spain should use supply side policies to increase employment and Growth.
There are two sides to a government’s policy; demand-side and supply-side. Demand-side policies try to influence the level of aggregate demand in an economy. It does this by controlling its taxation or spending (fiscal policy) or by influencing the demand for money through the rate of interest and the supply of money (monetary policy).
ReplyDeleteInside the demand-side policy we highlight the fiscal policy and monetary policy. To start off with, looking at the fiscal policy, there is expansionary and contractionary. Expansionary fiscal policy is when the government increases its spending or cuts taxes to boost up aggregate demand, output or unemployment in an economy. This usually means that the government is running budget deficit. The budget refers to the amount a government spends each year compared to how much it raises in revenue from taxation. If the government revenue exceeds tax revenues, the budget will be deficit. The government usually borrows money to pay for this difference between its revenue and expenditure.
There is also a contrary fiscal policy. This is used to reduce aggregate demand in the economy in order to reduce inflation. A reduction in government spending and an increase in taxation will cause aggregate demand to fall and to reduce budget deficit. This could also be a way into surplus if tax revenues exceed public sector spending.
In the past however, it has been argued that fiscal policy has not worked properly. It is not an accurate enough policy, governments find it difficult to find out how much to adjust spending and taxation in a recession or a boom. Another thing is crowding out; public spending might cause private spending to suffer or be `crowded out´. This happens when the government borrows money from the private sector to finance its spending. This money is no longer available to the private sector to finance its spending. This money is no longer available to the private sector itself for any private sector spending. Further on, taxes and incentives are another problem; raising taxes on profit and incomes reduces work economic incentives and economic growth as high taxes can cause people to work as hard. Lower productivity reduces profit and output. This has the same effects as increasing costs from the firms. Demand falls and unemployment rises. Lastly, expectations of inflation form the expansionary policy are another problem. Increased aggregate demand form expansionary fiscal policy can cause prices to rise. The expectation of this can cause wages to rise with fear of rising prices. This causes cost push inflation and rising unemployment.
Lately, governments have accepted these problems with fiscal policy and have adopted some fiscal rules. The first is that current and capital expenditures are managed separately. This is also that costs and benefits of long term capital investments can be easily identified. Secondly, governments can only borrow to pay for public investment and not to fund current spending on public sector wages and expenses. Thirdly, the public sector debt as a proportion of GDP should be kept at a low and stable level so that repayments do not become a burden.
The monetary policy on the other side involves varying the interest rate charged (the price of money by the central bank for lending money to the banking system in an economy and controlling the supply of money. The control of demand of money is controlled through the use of interest rate. Commercial banks will not want to have their loans with the central bank being charged at a different interest rate than they charge their own customers for loans. The supply of money is controlled not by charging the amount of notes and coins but by providing short-term and long-term bank deposit options.
I think that Spanish government should sue all the people that work, own the banks etc. and get them into jail, and so this way there will be no banks and the economy would be renewed shortly, like what happened in Iceland.
The government has two big different groups of Demand side policies. The Fiscal policy tries to influence the level of aggregate demand in an economy. It does this by controlling its taxation and spending. The monetary policy influences the demand for money through the rate of interest and the supply of money.
ReplyDeleteThe Spanish government could try to solve the lack of demand in the following different ways. First, by reducing income taxes. This would rise disposable income and consumer spending. As a consequence prices and profits would rise, firms would employ more labor and more disposable income. The downside of this would be more inflation and public deficit.
Another way the Spanish government can fight recession is by reducing taxes on profits. This would make prices of products and services to fall and therefor consumers would benefit and increase consumption. This would also expand firms output and reduce unemployment but public deficit would rise.
Another way to fight recession via fiscal policies would be by reducing indirect taxation (VAT) which would cause after tax prices to fall and demand to expand. Again this would have a negative effect on public deficit.
Last of fiscal policies the government could use is rising public spending. This would increase workers disposable income. Firms would increase revenues, profits, increase output and demand for labor. As all the other fiscal policies this has a negative impact on public deficit.
A diferent way to fight recession is by using monetary policies. Specifically, expansionary monetary policies, which consist on cutting interest rates. Interest rates are the price of money. If they fall, consumers and firms will find it cheaper to borrow. Another effect of low interest rates is that people will be more likely to spend the money than to save it. As result of all this, consumers expenditure will increase and firms will invest more meaning more demand for labour, less unemployment and increased economic growth.
Government’s frequently use policies to influence the economy. There are primarily two: Demand-side policies and supply side policies.
ReplyDeleteDemand-side policies are policies that try to influence the level of aggregate demand in an economy. It does this by controlling taxation or spending (which is called fiscal policy.) or by influencing the demand for money through interest rate and money supple. Supply-side policies aim to increase the productive output of the economy (aggregate demand supply) which will result in higher levels of unemployment & growth.
Spain, would need to use demand-side policy as it is usually used when the government is running a budget deficit, which is what is happening to us here in Spain, this is why we use demand-side policy and not supply-side.
We can divide demand side policies in two. Expansionary and Contractionary. Expansionary is when the government increases its spending or cuts taxes to boost aggregate demand, output or unemployment in an economy. Which is perfect when the country is running on a budget deficit? We could also use contractionary fiscal policy which opposite to expansionary fiscal policy, aims to REDUCE aggregate demand in order to reduce demand in the economy which will lead to a decrease in inflation. A reduction in government spending and taxation increasing will cause aggregate demand to fall and to reduce the problem: budget deficit. (The budget will be reducing, money will go into surplus if tax revenues exceed public sector spending etc…)
There are though, problems with fiscal policy which we must take into consideration. The fact that it is not an accurate enough policy may cause governments to find it difficult to know how much exactly to adjust spending and taxation in a recession, causing unemployment. Public spending may cause private spending to suffer from “crowding out”, which basically means the government is borrowing money from the private sector to finance its spending, resulting in no money available to be spent by the private sector for the private sector to spend itself. More problems may include rising taxes on profit and incomes may result in a decrease in incentative, lower productivity and this has the same effect as increasing costs, for a firm. The last problem of many would be expectations of inflation from expansionary policies. This means that increased aggregate demand from expansionary fiscal policy can cause prices to rise. The expectation of this can cause wages to rise with fear or rising prices.
With these problems, some solutions have been created by governments to deal with the issues. These include current and capital expenditures being managed separately, governments only being allowed to borrow money to pay for public investment and not to fund current spending on public sector wages and expenses, and lastly to keep debt in the public sector low and stable at level so that repayments do not become a burden.
I n conclusion, Spain, should consider expansionary or contractionary demand-side policies to aid in the recovery of their economy.
Well done everyone.
ReplyDeleteCommon errors were as follows
No one made the effort to find any statistics about the Spanish economy from wikipedia or google.
You could have talked about the spanish economy from the beginning of the question and apply your notes more clearly to the question.
Please have a look at all the revision notes i have posted for your exam. Please download and keep safely as they might be removed at any time from the blog!
Here are your marks
Emeline C
A short and rather unorganised answer. You have covered many important points, but you didnt apply to the question very well with use of examples or statistics (wikipedia or google stats on the Spanish economy).
Sanzhar B
Good answer. Your introduction was not very clear enough and you needed to apply more to the Spanish economy (use wikipedia or google to get some stats).
Felipe C+
A good introduction, lots of detail, but little application to the Spanish economy. The final part of the question about Spains economy was weak.
Sara C+
A good start to your question, but your application to the question and knowledge of the Spanish economy was weak. You cannot answer an exam question with 'put them all in jail'!
Clear arguments please as we do need banks in our economy (we study why banks are important Sara).
Ibon B+
A good answer Ibon with a clear attempt to apply it to the Spanish economy. A longer introduction and a bit more detail would have pushed you mark higher.Well done.
Altair C+
A good attempt with lots of detail, but you have not applied your answer to the Spanish economy.
Marcos B
Lots of detail but very little application to the Spanish economy.
You needed to refer more to the question and maybe find some stats from wikipedia or google.
Sam
No homework presented.