Macroeconomic - Government Policies in Reducing Inflation and Unemployment

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MACRO-ECONOMIC | Discuss the role of government policy in reducing unemployment and inflation. In your discussion make use of the diagrammatic representation of the macroeconomy developed in lectures in Term 2 |

Unemployment and inflation are factors that have negative effects on the performance of the economy as a whole. Therefore, policies to achieve low and stable price inflation, a high and stable level of employment are big macroeconomics issues of our time. This essay focuses on discussing the role of government policy on reducing unemployment and inflation in relation to Keynesian and Monetarist approaches, including examples of impacts of expansionary fiscal and monetary policies on New Zealand economy.
Fiscal policy is a …show more content…

Expansionary monetary policy may be used during an economic recession to boost demand and employment by cutting interest rates. However, increasing demand can push up prices and may increase consumer spending on imported goods and services. In some cases, lower interest rates may be ineffective in boosting demand. Therefore in March 2009 the Bank's Monetary Policy Committee announced that in addition to setting Bank Rate, it would start to inject money directly into the economy by purchasing assets such as government bonds or other securities - often known as quantitative easing. This means that the instrument of monetary policy shifts towards the quantity of money provided rather than the price at which the Bank lends or borrows money (Bank of England website)
Fiscal and Monetary policies come with their own set of advantages and disadvantages. The most likely argument against its implementation is the substantial lag that accompanies both these policies, for example the time from when the policy has been implemented till the time its impact is felt in the economy. The following section will indicate how the expansionary Fiscal and Monetary Policies impact price stability (inflation rate: 1-3%) and full employment objectives of New Zealand.
Both monetary and fiscal policies have a significant impact on inflation. An Expansionary Monetary policy results in lowering the interest rate (OCR) as

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