Monetary Policy and Economic Growth

This assignment delves into the complex interplay between monetary policy, fiscal stimulus, and their impact on economic growth. It encourages critical analysis of different theoretical frameworks and empirical evidence regarding unconventional monetary policy measures. Key concepts explored include liquidity traps, inflation targeting, and the effectiveness of various policy tools in stimulating growth.

Economics for
Business

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Use of supply side policies to facilitate economic growth.....................................................1
TASK 2............................................................................................................................................5
Use of Fiscal and monetary policy to stimulate economic growth........................................5
CONCLUSION................................................................................................................................8
REFERENCES..............................................................................................................................10

INTRODUCTION
Economics for business deals with the issues which are having direct or indirect impact
on the functioning of corporations or country. A country is affected by many domestic and global
factors which bring fluctuations in different economic determinants such as price level, inflation
rate, interest rates, employment rate and many others (Woodford, 2011). In order to stabilize the
economy government and other legislative bodies like central banks adopts different measures
such as supply side policies, fiscal policy and monetary policy. Supply side policies focus on the
enhancement of efficiency and productivity of the different sectors of the country, fiscal policy is
the tool adopted by Government to stabilize the economy through making changes in spending
and taxation and monetary policy which is used by central bank is the method through which it
regulates the money supply of the country (Gertler and Karadi, 2011). Present report is prepared
to elucidate the impact of all the three mentioned tools to bring growth and development of the
economy.
TASK 1
Use of supply side policies to facilitate economic growth
Supply side policies are the measures adopted by the Government to escalate the
productive efficiency of the economy by focussing on supply side performance. Objectives of
supply side policies are bringing high economic growth, reducing the inflation rate, lowering
down the unemployment in the country and bringing equilibrium in balance of payments (Galí,
2015). It is used by many countries to improve condition, among all UK has been the country
which has used it in an integrated manner in wide manner which has benefited in effective
manner.
Objectives of supply side policies
 It focusses on the core economic determinant of the country that is GDP (Gross Domestic
Product). Using supply side policy improves the growth rate of real GDP along with
maintaining the consistency level.
 It has the prime objective of bringing improvements in the productivity of the factors of
production. The fundamental factor of production in a country is the capital and labour.
By using different methods and tools the efficiency of capital flow as well the labour
productivity through mobility is increased (Curdia and Woodford, 2010).
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 In order to increase the productivity of economy, through using supply side policies
emphasis is laid on the development of social overheads such as education and health.
Improvement of skills, knowledge and flexibility has direct impact on economy's growth.
 Industries and businesses are the core areas which generate revenue and capital for the
country. Supply side policies cater to improve efficiency and competition in product
markets through inculcation of new technology or providing grants. To reduce unemployment rate in the country (Kiyotaki and Moore, 2012). Labour is the
essential part of an economy that plays vital role in enhancing productivity hence supply
side policies aims at utilizing the human resources of the country through different
methods such as increasing welfare benefits, influencing trade unions and other related.
Supply side policies
In order to accomplish the above objectives, different measures are adopted in the form
of some policies.
 Labour market deregulation to enhance the efficiency of the whole market.
 Liberalising the financial market to increase the competitiveness in the market and its
efficiency.
 Reduction in the trade obstacles.
 Privatisation that is the selling of state owned business to the private owners to increase
the efficiency (Mahadeva and Sterne, 2012).
 Deregulation that is the minimization of regulations and obstacles in trade to increase
competitiveness.
 Initiating the education and training
 Minimization of the trade union power Improvement of transport and infrastructure of economy.
Implementation of supply side policies by UK in their economy
 Through implementation of deregulation in the product market of the economy that is
liberalising the rules and regulation laid for the trading entities. In UK this policy is
adopted to remove the additional barriers in the entry of the new small and medium
business enterprises in the market (Stein, 2011). Along with this it fosters the growth of
existing business in the market through less number of obstacles.
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 The public sector capitalist country have initiated the privatisation through selling of state
owned companies to the private owners in order to increase the efficiency of the
companies along with the enabling of productivity gains to the employees (Hamilton and
Wu, 2012). With there has been significant increase in efficiency along with the
competition level in the market.
 In order to utilize the labour resources of the country in the more lucrative manner, UK
has initiated the removal of rigidities in the labour market and further restrictive
practices. This is done through the adoption of certain measures such as protection of
employment, bringing limitations to the enforcement of strikes by the labour of the
country and introducing the secret ballots around the nation through which they can share
their grievances and issues can be resolved (Cúrdia and Woodford, 2015). Further, in this
there is the encouragement of the labour mobility and flexibility. With the free movement
of labour the significant improvement in the productivity is seen having positive effect on
the economy growth of nation.
 Recognized as one of the best education curriculum in the world, UK has prime focus on
the education level of the country. With this it is able to enhance the skills and talents of
the country having direct impact on the growth and prosperity. With the improved
standards of teaching and development of human capital country's dominance in global
market is increased (Lenza, Pill and Reichlin, 2010). In this way UK government caters
to reduce the unemployment rate in the country with the effective utilization of human
resources. One of the effective measure to regulate the productivity level of the country is the
regulation of tax system. This has the direct impact on the income and the profits of the
consumers as well the producer in the country. By making changes in this such as
reducing the direct taxes and further amendments the productivity of the people can be
increased (Arrow, and Kruz, 2013). In this way the national output can be enhanced that
foster the economic growth. It also plays vital role in maintaining the inflation rate and
price level.
Impact of supply side policies on economy
Implementation of the supply side policies has both advantages and disadvantages on the
economy.
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Advantages
 It helps in checking the inflationary pressures in the economy for the long term due to
consistent productivity gains in both product and labour market.
 It improves the balance of payments of the economy through enhancement of the
productivity and the efficiency in the labour market. It brings sustainability growth and
competitiveness along with the regulation of the unemployment level. In contrast, with the other measures in which there are many negative implications such
as impacting harm on the economy in different forms such as bringing conflict in the
objectives such as of stable prices, full employment, high economic growth rate and
equilibrium in balance of payments (Auerbach and Gorodnichenko, 2010).
Disadvantages of using supply side policies
Along with the implications in the positive form there are some areas in which it harms
the economy negatively in the very significant manner. In the following mentioned it ways it
affects the economy in the opposite way.
 The steps adopted in the economy in the form of supply side policies are very late results
yielding methods. In these methods the desired outcomes are derived later on after the
use for longer period. Such as the education and training is the very slow process when it
is used for around 25 years it yields the wanted outcomes and targets that are to be
accomplished (Davig and Leeper, 2011).
 The increase in productivity decreases the emphasis laid on the profit and revenue
generation objective. When the country such as UK has the focus on the increment of the
productivity level it lags behind in the enhancement of the money supply. In this way the
efforts made to bring improvements in the labour market hamper the growth of product
market.
 The methods adopted by the country such as the lowering of the regulations, relaxation in
the taxes laid on the products and services and the minimization of the power of trade
unions has the negative impact on the distribution of income in the economy. It leads to
the fostering of economic growth but unequal distribution (Cuadra, Sanchez and Sapriza,
2010). This increases the gap between the rich and poor and the continuous use of this
policy widens the gap.
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 Lastly the use of supply side policies is expensive in nature such as education and
training in the country, relaxation in the taxes and issuing of equities is expensive for the
country to perform the functions.
TASK 2
Use of Fiscal and monetary policy to stimulate economic growth
Fiscal policy is the toll used by the government with the aim to stabilize the economy by
making changes in the expenditure and the taxation. Monetary policy is the tool adopted by the
central bank to regulate the money supply in the economy through different measures such as
making changes in the interest rates, open market operations, bringing variations in bank rates
and other measures (Monacelli and Perotti, 2010.). Using these three approaches the economy of
the country is stabilized.
Economic regulations and reforms play a significant role in managing and maintaining
markets and economies of the world. Countries monitor economic policies in order to manage
competitiveness and growth of the economy. Fiscal and monetary policies are the two significant
tools used by the government in order to regulate the economic rates and business growth of the
nation. AUTHOR defined these policies as powerful tool used by Federal Reserve to steer the
economies in the right direction.
Fiscal policy is an economic policy which helps in regulating the impact on the economy
through revenue collection and government spending of the country. The tools used to regulate
fiscal policy in the economy are Government spending and taxation powers. Business units uses
these measures in order to analyse and evaluate the impact on profitability and growth however
central government regulates the policies to stimulate economic positions of the country and
attain effective measures of growth and development (Cimadomo, 2012). The two most common
types of fiscal policy in the economies are expansionary and contractionary fiscal policies. The
former focuses on enhancing government spending in the economy in order to cover up the low
market demand while the former deals with lowering the spending in the economy in order to
regulate high demand. For example during financial crises in 2007 expansionary fiscal policy
was used to modify the low market demand in the market. The alternative adopted for the same
was to lower tax rate in the economy for enhancing disposable income for businesses and
corporates (Mertens and Ravn, 2014).
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Monetary policy on the other hand is developed in order to regulate the flow of money
within the market. The impact of this policy is to enhance market growth by controlling inflation
factors in the market. This policy is used to ignite the slow economy however the control of the
same is with central bank of the country. The goal of monetary policy is to enhance easy money
requirement in the country. The tools to control and regulate the monetary policy of the country
are interest rate and reserve requirements (Auerbach, Gale and Harris, 2010). It helps the
economies in dealing with big and critical issues of financial crises, inflation, depression etc. The
most common types of monetary policies existing within the economy include expansionary and
contractionary monetary policies. Both the mentioned measures play a crucial role in managing
business operations and delivering favourable results for economic growth.
Expansionary policy is defined as the situation where the interest rate of the country is
decreased in order to ensure effective flow of money within the economy. Federal reserve uses
this measures to enhance effective flow of money within the economy (Kerr and Lincoln, 2010).
On contrary to this contractionary policy is adopted in regulate the flow of money in economy.
This is done by increasing the interest rate which motivates in increasing investments in the
economy which helps in regulating excess flow of money in the market.
Impact of Fiscal Monetary policy on Economic growth
In an economy the determinants of the economic growth are the aggregate demand and
the aggregate supply. These two factors determine the efficiency and the productivity of the
economy in different perspectives.
Aggregate demand in an economy measures the gross domestic product that is the total sum of
all the factors of productions in one and in the other it determines the total value of the finished
goods in an economy in a year. It is measured through the summation of the total consumption,
total investment, total government expenditure and the net export of the country (Devlin, 2014).
Total consumption is the amount of total goods consumed in an year by the countrymen, total
investment is the capital flow in an economy to generate more revenue in the areas such as
construction and others, government spending refers to the amount has expended on the
development of the country and its economic situation and lastly net exports refers to the
difference of the exports from the country and the imports in the country (Murfin, 2012.). It is
stated that when an economy has the high aggregate demand than it is infers that people are
having good disposable income and economy is growing with the faster pace.
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Aggregate supply is the sum total of the amount of product and services are produced in an
economy. It is the amount which producers in an economy generate by the utilization of all the
factors of production.
The above mentioned factors have the direct impact on the economic growth of the
country. Such as when aggregate supply and aggregate demand increases the economy started
growing with the significant amount of growth rate. The tools that are fiscal policy and the
monetary policy has crucial role to play in determining the growth of an economy (Allen, Tainter
and Hoekstra, 2012). Government and central bank use this policy to stabilize the economy as
per the present condition and the suitability of its use. At the time of inflation when there is large
amount of money supply in the economy, the government uses contractional fiscal policy and
reduces the spending. At the same time central bank also uses contractionary monetary policy in
which it reduces the money supply in the economy through strict regulation and increment in
loan interest rates and other measures such as selling of government securities and other
operations. On the other hand at the time of recession the government take the opposite step and
adopt expansionary fiscal policy in which the measures are taken to increase the spending and
central bank increases the money supply in the economy to increase purchasing power
(Costantini and Mazzanti, 2012).
Fiscal Policy and economic growth
Economic growth refers to the process of reviving of economy from the time when
country is facing the situation such as depression or recession. At that time government uses the
expansionary fiscal policy. Use of expansional fiscal policy has impact on different sectors such
as infrastructure, social overheads, unemployment and consumer spending.
Infrastructure: When the government uses expansional fiscal policy in increases the spending in
an economy in different sectors such as infrastructure. As the core of the country economy is the
strong infrastructure such as its electricity, roads and transports, communication and other related
(Safarzyńska and van den Bergh, 2010). With the increase in finances given to this section the
significant improvement is seen the development and growth of the country. This is reflected
with the fast pace growth in the revenue generation and efficiency of operational functioning.
Social overheads: Government increases its spending in the social overheads as well such as in
education, health and other facilities. When an economy has the good education the productivity
and capabilities of the countrymen increases in the considerable manner. I this way when
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government has the increased expenditure in this section the economy have better opportunities
of growth and development (Borrás and Edquist, 2013).
Unemployment: Government spending in different sectors leads to the generation of many
opportunities for the unemployed in the country. With the expansion of new business and other
small business enterprises the possibilities of the growth increases. Further the spending also
increases the employment conditions through decrement in the regulation and other obligations.
Consumer spending: When the government has large amount of involvement in the growth and
development of the economy it raises the purchasing power of the consumer in the considerable
amount.
Monetary policy and economic growth
Monetary policy being the tool to regulate the money supply of the economy. As there
are two types of monetary policy that are expansional and contractionary policy used at recession
and inflation respectively. There has been crucial role of expansionary monetary policy in the
economy to get it out from the condition of economic downturn and depression.
It is processed through the lowering of interest rates, reducing the reserve requirements, open
market operations and other related.
Lowering of interest rates: Central bank in order to expand the money supply in the economy
the country is able to have the large amount of money flow amount (Devlin, 2014). Lowering of
interest rates has different implications such as reduced interest rate makes the loans inexpensive
encouraging the development of the business enterprises and their growth.
Reducing reserve requirement: Banks are supposed to keep certain amount with them in the
form of reserves. By adopting different methods such as expansionary monetary policy the
reserve requirements are reduced with this the businesses and consumers are having more money
with them. IN this way the spending become easier (Kerr and Lincoln, 2010).
Open market operations: Central bank in order to increase the money supply in the economy
sells the government securities and bonds. In this the there is significant amount of growth seen.
CONCLUSION
The present study is prepared to outline the impact of supply side policies, fiscal policy
and monetary policy on the economic growth of the country. It can be articulated that by
adopting different approaches it is used. Such as supply side policies increases the efficiency and
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productivity of country on the other hand fiscal and monetary policy through expansional
measures stabilize the condition of the economy.
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REFERENCES
Books and Journals
Allen, T.F., Tainter, J.A. and Hoekstra, T.W., 2012. Supply-side sustainability. Columbia
University Press.
Arrow, K.J. and Kruz, M., 2013. Public investment, the rate of return, and optimal fiscal policy
(Vol. 1). Routledge.
Auerbach, A.J. and Gorodnichenko, Y., 2010. Measuring the output responses to fiscal policy
(No. w16311). National Bureau of Economic Research.
Auerbach, A.J., Gale, W.G. and Harris, B.H., 2010. Activist fiscal policy. The Journal of
Economic Perspectives. 24(4). pp.141-163.
Borrás, S. and Edquist, C., 2013. The choice of innovation policy instruments. Technological
forecasting and social change. 80(8). pp.1513-1522.
Cimadomo, J., 2012. Fiscal Policy in Real Time*. The Scandinavian Journal of Economics.
114(2). pp.440-465.
Costantini, V. and Mazzanti, M., 2012. On the green and innovative side of trade
competitiveness? The impact of environmental policies and innovation on EU exports.
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Cuadra, G., Sanchez, J.M. and Sapriza, H., 2010. Fiscal policy and default risk in emerging
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Davig, T. and Leeper, E.M., 2011. Monetary–fiscal policy interactions and fiscal stimulus.
European Economic Review. 55(2). pp.211-227.
Devlin, R., 2014. Debt and crisis in Latin America: the supply side of the story. Princeton
University Press.
Galí, J., 2015. Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New
Keynesian Framework and Its Applications. Princeton University Press.
Gertler, M. and Karadi, P., 2011. A model of unconventional monetary policy. Journal of
monetary Economics. 58(1). pp.17-34.
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Hamilton, J.D. and Wu, J.C., 2012. The effectiveness of alternative monetary policy tools in a
zero lower bound environment. Journal of Money, Credit and Banking. 44(s1). pp.3-46.
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Lenza, M., Pill, H. and Reichlin, L., 2010. Monetary policy in exceptional times. Economic
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Mahadeva, L. and Sterne, G. eds., 2012. Monetary policy frameworks in a global context.
Routledge.
Mertens, K.R. and Ravn, M.O., 2014. Fiscal policy in an expectations-driven liquidity trap. The
Review of Economic Studies. 81(4). pp.1637-1667.
Monacelli, T. and Perotti, R., 2010. Fiscal Policy, the Real Exchange Rate and Traded Goods*.
The Economic Journal. 120(544). pp.437-461.
Murfin, J., 2012. The Supply‐Side Determinants of Loan Contract Strictness. The Journal of
Finance. 67(5). pp.1565-1601.
Safarzyńska, K. and van den Bergh, J.C., 2010. Demand-supply coevolution with multiple
increasing returns: Policy analysis for unlocking and system transitions. Technological
Forecasting and Social Change. 77(2). pp.297-317.
Stein, J.C., 2011. Monetary policy as financial-stability regulation (No. w16883). National
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Woodford, M., 2011. Interest and prices: foundations of a theory of monetary policy. Princeton
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