Two Of The Most Implemented Policies Government Use To Achieve Economic Growth Are Monetary Policy And Fiscal Policy

Topics: Monetary policy, Inflation, Public finance Pages: 6 (1652 words) Published: March 1, 2015
According to a article by Rich Karlgaard from forbes. During the great recession. U.S economy was performing better then expected and was growing. From 2008 to 2010, U.S GDP is projected at 14.3 trillion, 14.2 trillion, 14.6 trillion. So how did this actually happen? Carl Schramm, who heads America’s top entrepreneurial think tank, the Kauffman Foundation, explain in a interview with the author: “The single most important contributor to a nation’s economic growth is the number of startups that grow to a billion dollars in revenue within 20 years.” The statement made by Carl Schramm suggested that the increase of start ups, is the most important contributor to a nation economic growth. (Karlgraard,2010)

Economic growth is an increase in of the Real Gross Domestic Product (Real GDP). And it is mainly cause by two factors, an increase in aggregate demand(AD) and aggregate supply(AS). According the the formula AD = C + I + G + X – M. C = Consumer Spending, I =Investment, G = Government spending, X= Export, M= Import. If there is a increment in investment, Government spending , consumer spending or export, there will be economic growth. In the by Rich Karlgaard, there is a increment in investment ,government spending and consumer spending which is what causes the growth. And to have such increment, it would depend heavily on the government. (Pettinger,2011)

Having economy growth would mean a better standard of living, More jobs, environmental benefits but of course there will be a trade-off. In this essay, we will explore the government contribution to the economy growth and the trade-off of economic growth.

Fiscal And Monetary Policies
According to the formula AD = C + I + G +X –M, we understand government have a huge part in the economic growth of a nation. If government spending increase it will cause the the AD to increase as well which would then lead to the increment in the GDP of the nation. Conversly, government can decrease their spending power to control the growth. Fiscal Policies and Monetary Policies are what the government use to control economic growth. Lets now explore how this two policies work

Fiscal Policies
Fiscal Policies is where the government uses they spending and taxation power to influence the economic of a nation. By increasing or decreasing taxation, the government is able to decide the amount of disposable income their people have. Disposable income is what causes spending, When people have more disposable income it will encourage them to spend more, business owners would then need to increase their productivity to meet the demand of the market which would mean that more jobs would be created, causing economic growth. Likewise if tax was to be increased, the amount of disposable income will be lower,which in turn causes the economic to depreciate.

It is also stated in the Laffer’s curve the positive impact that lower tax rate have on work,output and employment. According to the Laffer’s curve, higher taxation doesn’t higher tax revenue. At a tax rate of 0 % the government tax revenue would be 0. But like wise is the tax rate is at 100% the tax revene would be as 0 as well, as no one is willing to work for after-tax wage of 0. (Laffer,2004)

Government spending is another factor under the fiscal policy, When the government spends more on goods and services, Businesses improve, causing more demands which also mean more jobs will be created. And the population will have more disposable income. Conversely, If Government spend lesser, the population will have less disposable income which will cause the economic to depreciate.

It is indirectly stated in the formula AD = C + I + G +X –M, when government spending increase the aggregate demand will increase, which will then cause the GDP of a nation to increase.

Now lets examine, how countries uses expansionary and contractionary fiscal policy to steer the economic in a nation.In this article (weber,2012) ,...

Bibliography: Jeffrey M. Lacker, (2013). Monetary Policy in the United States: The Risks Associated With Unconventional Policies. [online] Available at:
Karlgaard, R. (2010). What Grows An Economy?. [online] Forbes. Available at:
Laffer, A. (2004). The Laffer Curve: Past, Present, and Future. The heritage Foundation, pp.1 - 16.
Mamo, F. (2014). Economic growth and inflation. 1st ed. pp.9 -10.
Moffatt, M. (n.d.). Expansionary Monetary Policy vs. Contractionary Monetary Policy. [online] About. Available at:
Pettinger, T. (2011). Is Inflation Caused by Economic Growth? | Economics Help. [online] Available at:
R Pettinge, T. (n.d.). Causes of Economic Growth | Economics Help. [online] Available at:, (n.d.). SparkNotes: Tax and Fiscal Policy: Fiscal Policy. [online] Available at: [Accessed 15 Nov. 2014].
The Moral Consequences of Economic Growth by Friedman, Benjamin M. (2008). American Journal of Agricultural Economics, 90(4), pp.1163-1164.
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