Analysis of Government Policy Tools to Influence Economic Behavior

This assignment analyzes the use of government policy tools to influence economic behavior, focusing on the impact of tax impositions on consumer demand, particularly for sugary products. It examines the concept of price elasticity of demand (PED) and discusses the potential effects of a su...Read More

Running Head: Government Policy Tools
The use of Government Policy Tools to Influence Economic Behavior
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Government Policy Tools 2
The use of Government Policy Tools to Influence Economic Behavior
Question 1
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.
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.
Graph: Changes in Demand for Sweets and Sugary Snacks after a tax imposition
A shift to healthy eating
A shift to unhealthy eating
P1
Tax
P0
Demand
Q1 Q0 Quantity
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 government’s 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.

Government Policy Tools 3
Question 2
Part a
Pumping up total spending is an expansionary fiscal government policy. It is mainly
aimed and expanding the economy’s 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 economy’s 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 didn’t 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.
Part b
Automatic changes causes an increase in the government’s budget balance. Given a fixed
level of government spending and a recessionary situation, the government’s 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.
Part c
Makin argued that a fiscal contraction is the best idea to boost macroeconomic growth.
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.
Part d
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

Government Policy Tools 4
money supply. As Makin noted, a reduction in interest rate will have a positive effect on the
economy’s level of investment as investors will be stimulated to borrow more capital. In the
same way, increased money supply expands economy’s income and encourages spending which
end up stimulating output growth. Monetary policy doesn’t risk the economy’s credit worthiness
and is thus effective compared to fiscal.