Economics for Managers Assignment: Fiscal and Monetary Policy Analysis

This economics assignment delves into key macroeconomic concepts and policies relevant for managers. It explores the impact of government interventions, such as taxes and subsidies, on consumer health and demand elasticity, particularly within the context of food consumption. The assignment further analyzes the effects of government spending and fiscal policies, including the use of automatic stabilizers during recessions and the potential benefits of fiscal contraction. Additionally, it examines the effectiveness of monetary policy in comparison to fiscal policy, illustrating how expansionary monetary policies influence interest rates and investment. The solutions utilize diagrams such as the IS-LM model to visually represent and explain the economic principles discussed, offering a comprehensive understanding of macroeconomic dynamics and policy implications.

Running head: ECONOMICS FOR MANAGERS
Economics for Managers
Name of the Students
Name of the University
Author note

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ECONOMICS FOR MANAGERS
Table of Contents
Answer 1..........................................................................................................................................1
Answer 2..........................................................................................................................................2
Answer (a)...................................................................................................................................2
Answer (b)...................................................................................................................................3
Answer (c)...................................................................................................................................3
Answer (d)...................................................................................................................................4

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ECONOMICS FOR MANAGERS
Answer 1
It is seen that in order to improve health of consumers in the economy it is necessary that
the government impose taxes or subsidy on the right goods to help people curb their
consumption of unhealthy foods. Elasticity of demand pays a crucial role in helping the
government decide the types of food they will impose taxes or subsidy this is because elasticity
of demand tells the degree of effect on demand with a change in price of the goods. The demand
for inelastic goods will not change with a change in price. On the other hand, demand for elastic
goods gets affected to greater extent to slight change in price.
Thus, in the particular scenario it is seen that some of the categories of dairy products and fruits
and vegetable of higher calorie has high elasticity of demand while others low calorie fruits and
vegetable have low elastic demand. Similarly, some of the high calories grains also have high
elasticity of demand while low calories grain has low elasticity of demand. Thus, the government
can increase the price of high calorie goods that has higher calorie, which will change the
demand significantly. Similarly, it can lower the price of healthy and low calorie foods with
higher elasticity so that with low prices the demand increases drastically.

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LM
LM1
IS1
IS
INTEREST RATE
INCOME
i
Y Y1
E
E1
E2
ECONOMICS FOR MANAGERS
Answer 2
Answer (a)
Figure 1: increase in government spending
Source: Author’s creation
From the above diagram, it can be seen that by increasing total government spending in
the economy, there will be an increase in money supply. This can be seen by a rightward shift in
the LM curve from LM to LM1. With an increase in LM curve and money supply in the
economy there will be more money in the hand of the people. This increases the savings of the
customers shifting the IS curve to the right from IS to IS1. Increase in money supply initially
leads to an increase in interest rate in the economy, which increases investment. Thus, such an

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ECONOMICS FOR MANAGERS
effect for the temporary period until the IS curve does not shift and adjust the interest rate helps
in increasing economic activity in the economy.
Answer (b)
During recession automatic stabilizers act in the economy in the form of increasing
budget deficit automatically in the economy by reduction in corporate tax, low tax revenue from
progressive taxes and others. Taxes from corporate profit reduce at the time of recession and low
tax liability on the rich people during recession. This makes it necessary for the government to
intervene with required fiscal policy. This is because a change in fiscal policy will stabilize the
changing condition of the economy during recession such as increasing corporate tax or
changing the type of taxes charged. Thus, separating fiscal policy from automatic changes will
lead to the fall in economic condition further.
Answer (c)
Fiscal contraction that is ignored in the respective debate can be used to improve
macroeconomic performances because with a contraction in fiscal policy such as increasing tax
and lowering spending of the government the economy can curb wasteful spending on programs.
This will lower interest rate, accelerate the rate of real investment, and reduce crowding out
effect. This in turn leads to an increase in the national income of the economy. This is done
because the spending on programs is not an investment and will not lead to addition to GDP of
the country. Thus turning the spending from such programs to useful private investment will
increase national income.

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Interest
Income
IS LM
LM1
E
E1
i
i
ECONOMICS FOR MANAGERS
Answer (d)
Figure 2: Expansionary monetary policy
Source: Author’s creation
Monetary policy as compared to fiscal policy work quickly on the economy as it directly
effects the money market. This can be seen as with expansionary monetary policy the money
supply increases in the economy and this leads to a fall in the interest rate. A fall in the interest
rate leads to a fall in the investment as investment becomes less profitable. However, the effect is
fast because it directly hits the money market, which allows the consumers to react quickly on it.
On the other hand, fiscal policy takes time to put its effect on the economy. Thus, expansionary
monetary policy is better than the fiscal policy.