Question

Discuss how government policies, such as fiscal and monetary, can influence economic growth.

Answer 1

Fiscal and monetary policies can be contractionary or expansionary.

Examples of contractionary fiscal policies are fall in government spending and transfer payments, increase in taxes. Contractionary monetary policy means reducing the money supply and hence increasing the interest rate. These policies lead to lower output and price level in the economy. Hence, they lower economic growth.

Examples of epanxionary fiscal policies are increasin in government spending and transfer payments, reduction in taxes. Expansionary monetary policy means increasing the money supply and hence reducing the interest rate. These policies lead to higher output and price level in the economy. hence, the encourage economic growth.