Effects of Economic Policies
Economic laws and policies are rules put in place to regulate the operations of different economic activities in a country. For any country to achieve sustainable development, policies and laws must be enacted to control procurements, investments, trade and infrastructure financing. Human behaviours influence most of the economic laws in consumption. Government intervention in the markets is through either fiscal or monetary policies. During the formulation of these laws and policies, most countries factor political interests/ideas as well as the International Monetary Fund.
Most of the government agencies/aspects have economic components. Since policies are designed to achieve particular objectives, the net effects vary from one policy to another since they serve different purposes. For instance, Macroeconomic stabilization policies are directed to regulate money supply in an economy. Managing money supply in an economy counters inflation and moderates business cycles.Most countries adopt stabilization policies when they want to pull out their economies from recession. This is where fiscal and monetary policies come into play. Under the fiscal policy, economic conditions are influenced by the use of taxes and government spending. A government may decide to spur economic growth by lowering taxes which have a positive effect on aggregate demand. Also, if a government decides to increase its spending on critical sectors of the economy, a multiplier effect will be created since many people will acquire employment and increase income.
The government, through the monetary sector/Federal Reserve System implements monetary policies to check on interest rates, inflation rates and employment levels. The Fed uses discount rates to increase economic output. By lowering discount rates on commercial banks, it means other interest rates are affected, and the banks can lend at a lower rate something which triggers more borrowing and spending by businesses and consumers. Another tool that the Federal Reserve makes use of to increase economic growth is reserve requirements. Banks must hold a certain proportion of cash or deposits with the Reserve bank. If the Fed decides to decrease the reserve requirements, banks have more money to lend at a low-interest rate, and this will have an expansionary effect on the economy. The last tool that the federal system uses to increase economic output is through Open Market Operations. When the Fed buys government securities in open markets, it increases the amount of money in circulation. This means banks have more money in reserves to lend to businesses and consumers at low interest rates. Investments made using these loans result into more production of goods and services.
Besides, trade policies regulate the flow of goods and services from one country to another. More trade barriers such as the import quotas, export taxes, tariffs and export subsidies affects international trade. Imposition of tariffs rises the prices of imported goods and this has a negative effect on the growth of the economy. For instance, the Trump administration has imposed tariffs on Chinese goods and this has reduced the GDP growth by 0.22 percent. More than 178276 jobs have been lost as a result and pay wages have also reduced by 0.15 percent. Additional tariffs accompanied with retaliation measures from the United States’ trading partners will see the GDP come crushing down. Export subsidies on the other hand have a positive effect on the economy. The government uses direct payments and tax reliefs on exporters to encourage more exportation of goods and services. Since the importing countries pay low prices for goods, exporting countries are more likely to produce surplus goods and these increases economic activities.
Economic policies have a significant impact on business development, employment and economic stability. Policies help in redistributing income, wealth and property. Antitrust policies and industrial policies encourage the growth of industries and at the same time govern their operations.
On my side, I therefore agree with the author that whenever economic policies are enacted in a country, positive and negative implications must arise on the economy. For instance, a government may decide to increase taxes carbon-based fuels and at the same time give subsidies to businesses that make use of renewable energy. The net effect of this measure is to discourage the consumption of carbon-based fuels and influence the growth of businesses that deal with renewable energy. Imposing heavy taxes on some goods make investors shift their focus to other sectors while granting some businesses tax exemptions together with subsidies results to increased investments which in turn leads to economic growth.Besides, contractionary policies tend to slow the economic output in a country by reducing the aggregate demand. When a government reduces its spending on some critical sectors of the economy, production of goods and services tends to go down and this curbs economic growth.
Moreover, if the government increases taxes on businesses, economic growth will slow down because many private sectors and corporations won’t have extra money for investments. When expansionary monetary policies are applied, the supply of money in the economy increases and this in turn reduces rates on interests. With low interest rates, investors borrow more money for investment purposes something which increases the economic output. Consumption also increases because consumers can now borrow cheaply and the payments on mortgages are low because of low interests. Tariffs are regressive and tend to reduce the output that is produced by the private sector. It is worth noting that tariffs tend to increase the value of the U.S. dollar but this has a negative effect on the exporters. When the dollar is more valuable, it means the prices of goods and services increases in the global market and exporters find it difficult to sell their products. Low sells translate to low revenues and this reduces the overall output of goods.
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