Government Policy Tools Economic Behavior †MyAssignmenthelp.com

Question: Discuss about the Government Policy Tools Economic Behavior. Answer: Introduction: When making any pricing decision, it is crucial for the decision maker to determine the price elasticity of demand for the product at consideration. This is because it determines the level of change in demand that may result from that price change. The major idea of imposing a tax on sugar is to make the products expensive so as to discourage consumption. I would support the tax imposition on the basis that it will most likely discourage the consumption of the product especially to the low and middle income group who rely mostly on the government health care management. For the rich group, consumption may not change but this will not impose huge costs on the government as most of them have some private doctors. For the high calorie sweets and sugary snacks, PED is -0.270 whereas for low calories its -0.295. This inelastic demand represents a small decrease in demand. The inelastic demand is the reason for the small demand decrease after the high price is charged; the shift to healthy eating is lower. However, the governments revenue will rise enabling subsidization of fruits and vegetables whose demand is depressed by high prices. The cost on health services will somehow be lower; but the tax imposed has to be high to effect some significant change. Pumping up total spending is an expansionary fiscal government policy. It is mainly aimed and expanding the economys income level and subsequently enabling the consumers and households to raise their spending. The additional spending will result in an increase in the aggregate demand and hence the economys price level will rise. Makin noted that this increase in spending will distort the balance of trade by consumption of goods that would have been exported if demand didnt go up. However, the simple idea is formed on the basis of Keynesian assumption of a closed economy. When general price rises, private investors produce more to supplement the high demand. Automatic changes causes an increase in the governments budget balance. Given a fixed level of government spending and a recessionary situation, the governments revenue collected from tax will fall since demand for goods and services from where government gets indirect taxes will fall. There will also be a loss of jobs from where government gets its direct taxes. So the government will be spending more but raising less revenue (budget deficit). To control the situation, the government cannot raise taxes because it will worsen the situation, it raises its spending by sourcing from increased borrowing. High borrowing raises the government budget balance. Makin argued that a fiscal contraction is the best idea to boost macroeconomic growth management. The government spends more on unnecessary programs of which it can do without and have no change on the economy. He quoted that increased borrowing to supplement extra spending only suppressed growth for the private investors as it resulted in increased interest rate. Thus, spending on wasteful programs should be cut. This cut will reduce the need for government to borrow and a lower budget balance will be the outcome. This change will result in a falling interest rate which will boost the investment level and hence growth stimulation. Conclusion: Economic stimulus is not always created through fiscal policy tools. Sometimes there could be the use of monetary policy tools by the central bank. What the central bank does during low economic performance is either cutting the interest rate or to facilitate the growth of the money supply. As Makin noted, a reduction in interest rate will have a positive effect on the economys level of investment as investors will be stimulated to borrow more capital. In the same way, increased money supply expands economys income and encourages spending which end up stimulating output growth. Monetary policy doesnt risk the economys credit worthiness and is thus effective compared to fiscal.