1. 5.1 Government Economic Policy
IGCSE Economics
5.1 Government Economic Policy

2. Learning Outcomes
Describe the government as a producer of goods and services and as an employer
Describe the aims of government policies
Explain Monetary, Fiscal and Supply-side policies
Analyse the use of fiscal, monetary and supply-side policies
Discuss the possible conflicts between government aims

3. Recap…. Discuss in pairs
What is a mixed economy?
What is the public sector?
Why do governments intervene in mixed economies?
How do governments intervene in mixed economies?

4. Introduction to Government Objectives and Policies

5. Question…. What’s the difference between a Government Objective?
Government Policy?

6. Task- 10 mins
Look at the newspaper headlines in activity 5.1 (Page 283 of the textbook)
For each headline identify:
What is the government policy?
What objective are they hoping to achieve?
How will this work?
Write your answers in a table:
Government Action
Government Objective
How will it work?

7. Government Objectives
Low and steady inflation
Low unemployment
Steady and sustainable economic growth (%change in GDP
- A positive balance of payments – to export more than we import
Two other possibles: - To reduce inequality in the country – to redistribute income and wealth in order to help the poor
- To protect the environment – to avoid pollution and congestion

8. Group Task
See what questions you can answer from the ‘Government objective questions’ sheet.
See which questions you can answer yourselves without using the internet.
Now use the internet to help you find any missing answers
Make a note of any questions you might have as you go

9. Macro Economic Objectives – Low and Stable INFLATION

10. Inflation Questions: What is inflation? How is it measured?
What level do governments generally like to keep inflation at?
What problems can high inflation cause for savers?
What problems can high inflation cause for businesses?
What is deflation?
What problems can deflation cause?

11. Macroeconomic Objectives – LOW Unemployment

12. Unemployment Questions….
Which people do official ‘unemployment figures’ include?
What problems can unemployment cause for governments?
What might cause unemployment to rise in an economy?

13. Macroeconomic Objectives – Economic Growth

14. Economic Growth Questions….
How is the size of an economy measured?
What are the benefits of economic growth in an economy to:
Households?
Businesses?
Government?

15. Macroeconomic Objectives – Favourable Balance of Payments

16. Balance of Payment Questions….
What is an import?
What is an export?
Why do governments want to make sure that there are more exports than imports?

17. A very brief introduction……
The MAcroeconomy

18. Macroeconomics is….. The study of national economies
Concerned with the allocation of a countries resources
Is concerned with measuring an economy’s:
total output of all goods and services (Aggregate Supply)
Total demand for all goods and services (Aggregate Demand)

19. Aggregate Supply and Demand
What is the difference between this diagram and the supply and demand model we have looked at before?
Is the government in an economy a producer or a consumer?
What questions do you have about this diagram?

20. The Macro economy

21. The important bit…. Governments are both producers and consumers
The contribute to aggregate demand and aggregate supply within an economy
They can also affect aggregate demand and aggregate supply using other policies
Government policies can be described as demand-side or supply-side

22. Governments as consumers – Government spending

23. Why do Governments spend money?
A government can use its spending power to:
provide goods and services that are in the public and economic interest, such as street lighting, national parks, universal education and health care, affordable housing
invest in national infrastructure such as road and railway networks, airports
support agriculture and key industries to provide jobs and output, and to invest in staff training, new machinery, and the research and development (R&D) of new products
manage the economy, for example to boost total spending during an economic recession to help firms and reduce unemployment
reduce inequalities in incomes and help vulnerable people, for example by providing welfare payments to people and families in need

24. Government Expenditure
Current Expenditure
Items that will be used up within a year
Capital Expenditure
Purchase of long lasting items

25. Unemployment Benefits
Current or capital?
Building new roads
Teachers Salaries
Unemployment Benefits
New Computers
MR Scanner
Stationery Supplies

26. Government Policies

27. Government Policies Fiscal Policy Government Monetary Policy Policies
Supply Side Policies
What can you tell me about these different policies?
What is the difference?

28. Government Policies Taxation Fiscal Policy Government Spending
Monetary Policy
Control of money supply
Interest Rates
Supply Side Policies
Boosting productive potential

29. Task – 2 mins Look back to your tables from Exercise 5.1
Are the government actions outlined in the headlines examples of:
Fiscal Policy, Monetary Policy or Supply Side?

30. Government Policies – Fiscal Policy

31. Fiscal Policy
Changing the total level of government spending and taxation
To change the level of aggregate demand for goods and services
and therefore on output, employment and prices

32. Changes in Aggregate DemandAS
Price Level P AD Y
Real Output

33. Task - Whiteboards
Draw a fully labelled diagram showing Aggregate Supply and Demand
Now show a shift to the right of the AD curve
What happens to P and Y? What do you think would happen to unemployment?
Now draw a diagram to show a shift to the left of the Aggregate Demand Curve
What happens to P and Y What do you think would happen to unemployment?

34. Expansionary Fiscal Policy
When the government wants to increase Aggregate Demand in order to boost output and employment
It will do this by………
Increasing Government Spending
Decreasing Taxation
How will decreasing taxation cause aggregate demand to increase?
???????????
Increase/Decrease
Increase/Decrease

35. Contractionary Fiscal Policy
When the government wants decrease Aggregate Demand in order to reduce inflation
It will do this by………
Decreasing Government Spending
Increasing Taxation
How will increasing taxation cause aggregate demand to decrease?
???????????
Increase/Decrease
Increase/Decrease

36. Task - Problems with Fiscal Policy
Use page of your books to help you answer the following questions:
What problems can be caused by an increase in government spending?
What is meant by ‘crowding out’
What problems can be caused by increasing taxes
What are the other criticisms of Fiscal Policy?
What are the ‘Fiscal Rules’

37. Government Spending and increased demand….The multiplier effect

38. Government Policies – Monetary Policy

39. Monetary Policy
Monetary Policy refers to actions taken by the government
to try to control the supply of money or the price of money
In order to influence spending (and therefore Aggregate Demand) in the economy

40. Who will interest rates directly affect?
Stakeholders affected by interest rates
People who already have debt
People who may want to borrow in the future
People who have savings
Businesses who already have debts
Businesses who need to borrow money in the future
Businesses who are deciding whether to save or invest their money
How will each of these groups be affected by an increase in interest rates?

41. Interest Rates and Exchange rates

42. Exchange Rate Policy….
Interest rates can also be used to influence the exchange rate of a national currency
Questions…….
Why might a government wish to change the exchange rate?
If the government wanted to increase exports, would it need the national currency to appreciate or depreciate?
How could interest rates help this to happen?

43. Step by Step In each of these scenarios…..What will be the impact on:
Interest rates are increased
Interest rates are lowered
Foreign capital is not attracted to invest
Demand for the currency reduces
This causes the value of the currency to depreciate
Domestic goods are now cheap to foreign customers
Exports are likely to increase (and imports decrease)
Favourable for balance of payments
Step by Step
Foreign capital is attracted to invest
Demand for the currency increases
This causes the value of the currency to appreciate
In each of these scenarios…..What will be the impact on:
AD?
Employment?
Inflation?
Domestic goods are now expensive to foreign customers
Exports are likely to decrease (and imports increase)
Unfavourable for balance of payments

44. Money Supply

45. Increasing the money supply - Quantitative Easing
The government increase the money supply by printing more notes and coins
However it can’t just randomly decide to print more money!!
Instead…..
The government uses the newly created money to buy financial assets (government and corporate bonds) from banks and other private organisations
This increases the amount of money that banks have to lend to people and firms

46. Video…..
It’s a bit complicated…… don’t worry, you only really need to get the general idea of what quantitative easing is
Watch and see if you learn something!

47. Quantitative Easing….. Put much more simply…..

48. Expansionary Monetary Policy
When the government wants to increase Aggregate Demand in order to boost output and employment
It will do this by………
Decreasing Interest Rates
Increasing Money Supply
???????????
Increase/Decrease
Increase/Decrease

49. Contrationary Monetary Policy
When the government wants decrease Aggregate Demand in order to reduce inflation
It will do this by………
Increasing Interest Rates
Decreasing Money Supply
???????????
Increase/Decrease
Increase/Decrease

50. Video – Bank of England
Watch the video ‘Interest Rates and Inflation in the UK’

51. Government Policies – Supply Side Policies

52. Supply Side Policies
Supply-side policies attempt to boost the productive potential of an economy and increase aggregate supply
Increased growth = more jobs + more incomes + lower inflation

53. Supply Side Policies…..
selective tax incentives e.g. tax breaks to encourage investment
selective subsidies e.g. to support development of new technologies
improving education and training to raise skills and productivity
labour market reforms to restrict trade union power
competition policy to outlaw anti-competitive behaviour
removing barriers to trade to increase choice and competition
privatization transferring public sector activities to private sector firms
better regulation simplifying or removing old and unnecessary regulations that otherwise raise costs and restrict business activity

54. Can Policies Conflict? No Yes
‘Keeping price inflation low and stable will make domestic goods and services more competitive. Demand for them will rise at home and overseas. This will help to improve the balance of trade and will boost jobs, incomes and tax revenues.’
‘Raising public spending, cutting taxes and interest rates to boost demand and employment will increase inflationary pressures and spending on imports.’
‘If workers expect inflation to remain low they are less likely to push for big wage increases. This will boost the demand for their labour. And if firms are more confident in the future they are more likely to invest in new capacity for growth. In contrast, rising inflation raises costs and lowers profits.’
‘Cutting public spending, raising taxes and interest rates to control inflation will reduce demand and therefore increase unemployment and reduce economic growth.’