Policies to Promote Economic Growth

Policies to Promote Economic Growth

Short Run

  • If the economy is producing below full capacity, then expansionary fiscal or monetary policy can increase AD, and thus increasing output
  • The advantages of fiscal and monetary policy is that they can often both stimulate both AD and AS
    • Lowering the rate of interest will both stimulate consumption and investment, and it is the investment that will increase AS
    • Government spending on things like education can also move AS to the right.

Long Run

  • For long-run growth to be achieved, the quality and/or quantity of resources has to increase
    • This is what SSPs tried to achieve
  • The measures that raise investment will therefore also raise AS

Stable Growth

  • Most government want stable growth, and this is for actual growth to match trend growth, where the trend growth rises over time.
  • Governments will want to avoid AD increasing faster than the trend growth permit, as this will cause overheating with inflation in the economy and balance of payments problems arising
  • Governments will also prevent AD increasing slower than the trend growth rate, since this would result in a negative output gap.