Discuss the Ways in Which Government Can Manage an Economy to Encourage Economic Growth There Are Various and Conflicting Views About How the Government Can Manage an Economy to Encourage Economic Growth.

Topics: Monetary policy, Macroeconomics, Inflation Pages: 1 (386 words) Published: March 7, 2013
1) Discuss the ways in which government can manage an economy to encourage economic growth There are various and conflicting views about how the government can manage an economy to encourage economic growth. At one extreme there is a non-interventionist view that suggests government should create a stable framework of rules within which a competitive capitalist economy can produce the necessary motivation for it to grow. Monetary policy needs to be focused on creating price stability with a current official target of 2% inflation, while exchange rate policy can be aimed at keeping the value of the currency stable in international foreign exchange markets. Fiscal policy can be used to support the monetary and exchange rate policies and the government should focus on their golden rule and sustainable investment rule to ensure that their finances do not crowd out private sector initiatives to carry out the investment that is necessary to bring out economic growth. At the other extreme is a view that, left to its own devices, a capitalist economy will be sluggish and businessmen will shrug off risk to pursue the quiet life? In this situation, the government must be proactive. It should use its fiscal policy to kick-start the economy whenever it is tending towards recession by budgeting for a deficit and expanding aggregate monetary demand. In order to increase the economy’s productive capacity, the government may use its expenditure directly to invest in new social and industrial capital. Exchange rate policy may be used to keep export prices competitive and this may involve allowing the exchange rate to depreciate so that export prices fall and import prices rise, making domestic producers most competitive. Finally, the government must take monetary policy responsive to the demands of fiscal policy and it should not impose constraints on the way in which fiscal policy is used to manage the economy. The current view of government policy is that the economy should b...
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