Lalaland Economy Evaluation

This article discusses the deteriorating economy of Lalaland and suggests the use of monetary and fiscal policies to improve it. It explores the theory of liquidity preference and aggregate demand and supply analysis.

Running head: LALALAND ECONOMY 1
LALALAND ECONOMY EVALUATION
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LALALAND ECONOMY 2
Introduction
It is the wish of every nation to have better economic growth. This can only be achieved
through the adoption of sound micro and macroeconomic goals by a country. A nation can use
two policies to correct a deteriorating economic growth namely the fiscal and the monetary
policies. The country of Lalaland has a deteriorating economic growth and various monetary and
fiscal policies have been suggested which can be used to correct this economy based on the
theory of liquidity preference and aggregate demand and supply analysis.
The theory of liquidity preference views the demand for money as the desire to remain
liquid but not to borrow (De Carvalho, 2015). The money “price” is the interest rate associated
with the money. The money demand is influenced by three motives namely the precautionary,
transactionary and speculative motives (Lea & Webley, 2014). Aggregate demand and aggregate
supply analyze tools which can influence a nation’s economic growth by influencing the nation’s
overall demand and supply (Wells, 2010).
The monetary policy
The monetary policy influences a nation’s economic growth mainly by use of interest
rates (Woodford, 2011). I would suggest that Lalaland country uses monetary policy as
explained to foster its economic growth. From the data given, Laland inflation rates have
increased for the last three years from 10 to 20 percent as its economic growth has decreased
from 2 to 0 percent. Increase in inflation rates means that there is more money circulating in the
nation than its demanded meaning that a nation’s level of interest rates are low. According to
liquidity preference, consumers spend more when they hold more money. Lalaland country
should, therefore, increase interest rates through its central bank. This will enable the nation to

LALALAND ECONOMY 3
minimize the amount of money circulating in the economy to a level which is desirable.
Consumers will be left to money equivalent to their needs and hence aggregate demand arising
from consumption in the nation will tend to decrease to match the aggregate supply by suppliers
in the nation. Decreased money in the economy decreases inflation and hence goods and services
are sold at reasonable prices. This will maximize the nation’s output hence improving the
nation’s economic growth.
The fiscal policy
The fiscal policy controls a nation’s economic growth through government expenditure
and taxation (Hansen, 2014). From the scenario of Lalaland country, inflation rates have
increased from 10 to 20 percent whilst economic growth has decreased from 2 to 0 percent. This
means that the government of the nation should reduce taxes in various sectors of the economy in
order to reduce costs of production and enable businesses to sell their output at reduced prices.
This means that consumers will increase their consumption when prices are decreased. More
sales are therefore made and businesses increase their productivity to cater for the increased
demand. More employees will be employed to participate in the increased productivity hence
reducing unemployment. As a result, the nation’s aggregate demand and supply increases and
hence the nation’s total output increases and this improve its economic growth.
Conclusion
In a nutshell, Lalaland country can utilize both the fiscal and monetary policies to
improve its deteriorating economy. The monetary policy which can be used by the nation is the
increase of the nation’s interest rates by the central bank while the fiscal policy which can be
used is the reduction in government taxes.

LALALAND ECONOMY 4
References
De Carvalho, F. J. C. (2015). Liquidity Preference and Monetary Economies. Routledge.
Hansen, B. (2014). The economic theory of fiscal policy. Routledge.
Lea, S. E., & Webley, P. (2014). Money: Metaphors and motives. In The psychological science
of money (pp. 21-35). Springer, New York, NY.
Wells, G. (2010). Teaching Aggregate Demand and Supply Models. The Journal of Economic
Education, 41(1), 31-40.
Woodford, M. (2011). Interest and prices: Foundations of a theory of monetary policy. princeton
university press.