Question

Two theories on Government Spending (described by Economists mostly) are Growth Policy and Stabilization Policy. What are the characteristics that make up Growth Policy? What are the benefits and drawbacks to using Growth Policy as a theory when establishing Fiscal Policy priorities? Explain.

Answer 1

Growth policy is the policy that attempts to maximize the long-run growth rate in an economy. Sustainable economic growth occurs because of increases in aggregate demand and supply. However, long-term sustainable growth ultimately depends on supply-side improvements because balance of payments and inflationary problems are less likely when the productivity of factors improves

The drawback to using growth policy is that it does not take into account short run stability in the economy and only focuses on long term gains. This leads to instability in the economy which further leads to aggravation of issues in the long run.