IB HL Economics (Macroeconomic Policies) Essay

Deflationary fiscal policies and tight financial policies provide often be used in conjucture during times in which inflation is on the reverse (perhaps a little too much(prenominal)), and when which the political relation aims to apply deflationary pressing to ensure that inflation does not rise too much.Deflationary fiscal indemnity is when governance expenditure drop-offs and revenue increases. tight monetary policy is when the suppy of capital is decreased and the interest grade are increased.Decreasing government expenditure will wee the act of limiting the amount of facilitation the government provides to society to consume/invest, pressuring society to decrease societys consumption/investment/expenditure. likewise, low total of cash as intumesce as high interest rates will apply a brake on firms and consumers expenditure as they at present incur a higher opportunity cost in overpowering/supplying/investing due to increased interest rates.Inflationary fiscal policy and loose monetary policy however, have the opposite emergence on the economy, and this is because they are implemented at times when there is deflationary pressure on the price level (deflation). inflationary fiscal policy will increase government expenditure as well as decrease taxation, and loose monetary policy will increase the supply ofmoney as well as decrease interest rates.By change magnitude government expenditure you can now subsidise goods, lowering cost which will have the effect of increasing consumption, as well as provide training schemes to help those who are unemployed find a job. increasing the supply of money increase the amount of flow of money in the economy as there has been an increase in the fluidity in cash. low interest rates attract firms as well as consumers as the opportunity costs to invest/consume have been decreased. for instance, if motorcar loans were previously at 7% during times of inflation (and the government implemented a tight monet ary policy), but via deflationary pressure and central banks implementing a decrease in interest rates the car loan interest rate goes down to 5%, it would be much more economical for you to buy a car when it was at 5% than 7% (increase consumption, which would lead to an increase in the price level as overall demand increases)