In general, a policy constitutes a detailed plan with certain goals and objectives. In relation to the subject of economics, understanding policymaking involves the utilization of independent and dependent variables. Indeed, is there evidence of a science that explains how individuals reach to a particular decision? If that is the case, then it is possible to assert that ‘The Decision’, which is a dependent variable, may undergo prediction or even occur through the alteration of factors such as the independent variables, which might comprise the causative aspects for The Decision. Undeniably, this situation is possible based on the actuality that the dependent variable, as well as other factors, poses an effect on the independent variable. Nevertheless, each person make several and different decisions, which are occasionally irrational, based on numerous reasons. Because of this, it is possible to assert the significance of understanding the connection between several independent variables and the Decision, which is the dependent variable.
However, comprehending such a relationship would be complicated. Despite this, do people really think that the decisions they make are usually haphazard without causation? Consequently, decision-making is a process that individuals tend to misuse or even ignore. This is because not much research has taken place in order to determine the validity and the scientific aspect of this process, especially concerning the field of economics. Regardless of the obvious complexity, how is it possible to recognize the independent variables that cause decisions and what are the exact relationships between the decisions and the mentioned variables? Supposing this, if individuals break down their choices into their constituents, perhaps it can be possible to identify the independent variables and further, comprehend their association to the decisions made.
a). Fiscal Policy
Fiscal policy does not necessarily involve the spending of money by the people or their respective government. It illustrates a scientific association between the combined spending, which is the Aggregate Demand (AD), and the macro aims of low unemployment, small inflation and desired growth in Gross Domestic Product (RGDP). Simply, the modifications in spending AD, based on the equation (C + I + G + Xp), create alterations within a single unit or category of the respective macro variables. Therefore, changes within expenditure can and usually do result into further changes within the factors of unemployment, RGDP or inflation. Furthermore, there is proof of a Cause and Effect association between Aggregate Demand and the three macro-variables, whereby the AD constitutes an independent variable while the macro variables comprise the dependent variables. Accordingly, the amalgamated spending ‘AD’ constitutes the combined expenditures within every component of a generic economy. These components include Consumption (C), Investment (I), Government (G) and Exports (Ex).
Undeniably, if the expenditure among each of the component increases as the other units remain consistent, then the sum total of the AD will rise correspondingly. Furthermore, increased spending in each or all of the units will boost demand. This will lead to the production of commodities and services, which will cause a decrease in unemployment, an increase in RGDP as well as a rise in inflation. In view of this, real world parameters such as forecast convictions, taxes, income and interest rates can also affect spending within C and I. Further changes within independent variables may change these units as well. For instance, a rise in income may boost consumer spending (C) and investment (I). Similarly, decreased interest rates may lower borrowing costs and thus, influence increased spending in C and I and borrowing.
b.) Monetary Policy
Another type of expenditure policy is the monetary policy. Unlike the previous one, this one is indirect and does not necessarily focus on spending. Accordingly, the monetary policy undergoes independent implementation by the Federal Reserve System and indirectly modifies nationwide spending within the private sector by altering the supply of money and rates of interest. This is because money supply is a considerable factor in any economy based on the effect it poses on borrowing of money as well as the use of it by consumers. Indeed, augmenting money supply will decrease interest rates. Alternately, a fall in money supply will boost interest rates. In addition to this, high rates may influence borrowers to spend and borrow less. In contrast, lower rates of interest may affect borrowers and influence to borrow more funds and thus, allow them to spend more.
Interestingly, the Fed is capable of modifying interest rates and money supply quantity in three ways. Foremost, it can boost or decrease the needed reserve ratio in relation to deposits. Secondly, it can alter the Discount Rate that the Fed imposes on banks when borrowing cash. Lastly, the Fed can enable Open Market operations in order to increase bank deposits. Apart from interest rates, there is evidence of numerous other dynamic parameters that influence the clients and the business society to borrow variably. Examples comprise future fears, unemployment and income. Since these parameters will occasionally change, it is unfeasible to forecast the precise effect of modifying interest rates on expenditure and borrowing. Nevertheless, monetary policy is significant and vital for any economy since the government can use it in order to discourage or endorse spending among consumers and the business community.
c). Supply Side Policy
The President as well as the Congress have the ability to use a policy that does not affect spending but in turn, modifies productivity all over the economy. This guideline is important since it influences the people within an economy to engage in a nation-building process. This is the Supply Side Policy. Indeed, by influencing a boost in the level of productivity, this particular policy augments output (RGDP) and at the same time, maintains the price levels at the same rate or even at a lower charge. Based on this, the supply side allows employers to produce more commodities at an even much lower price. The government is capable of achieving this result directly by participating in government-backed and sponsored research, which may result in augmented productivity. Apart from this, it may also motivate the private sector to spend its finances in R & D (research and development). The advantage of this is that it may lead to an increase in productivity within the economy.
Consequently, normal government expenditures, which are supply side, constitute public education finances. Technology and education lead to an increase in productivity based on the premise that they relate considerably. The government can also utilize tax decreases or subsidies in order to motivate the private sector to inject its funds in R & D, which will also boost productivity as mentioned. The Laffer Curve analysis, which assumes that hardworking taxpayers are increasingly productive at low tax rates, illustrates the supply side effect concerning the private sector. Nonetheless, modifications within the RGDP, either from monetary, fiscal, or even supply side policies may pose an implication on the environment and even the quality of life among individuals within a general economy.
In definition, the multiplier comprises the number of times that an increase in the national income surpasses the increase in investments of the demand that led to its occurrence. Indeed, an initial alteration within the AD can impose a larger or even more significant effect on the balanced income of the whole economy. Nonetheless, the multiplier arises out of the demand effect. In relation to the Law of Supply, changes in demand cause further variation within the price and production of commodities. Therefore, concerning the multiplier, this particular effect originates from the injections invested into the novel demand for products and services within the income’s circular flow. This incidence boosts further flows of spending and thus, establishes the multiplier. Based on its impact on spending, the multiplier can create a considerable eventual impact on employment and productivity within an equilibrium economy.
Consider this illustration; there is an increase of $300 million on capital investment. Such a boost in injection may motivate the establishment of several increases in spending. Organizations, which provide capital products, as well as construction firms which win tenders to create facilities such as new factories, will perceive a rise within their profits and incomes. Therefore, if the businesses and their respective employees spend a certain share of that supplementary income, then it may be possible to assert that a large proportion of the capital investment may undergo addition on the incomes of other individuals and companies alike. The total will continue to rise as the manufacturers of the surplus products and services experience a boost in their proceeds, of which they spend a specific percentage on more products and services in return.
- Advantages and Disadvantages of the Economic Policies
The fiscal policy has certain benefits and demerits. In terms of advantages, the policy encourages spending among individuals. Based on this, it is not overbearing since it encourages consumers to spend their finances and products and services that they like. Secondly, the fiscal policy utilizes the multiplier. Because of this, the amount of money spent in relation to the regulation enables the government to gain more money. However, the disadvantage is that there is uncertainty especially in determining whether the policy will function or remain constant. Moreover, the policy may enable inflation.
Concerning its advantages, this particular policy advocates for the decrease of interest rates, which are favorable among individuals. In addition, the regulation is fast and easy and does not pose significant political consequences. Nonetheless, on the demerits, the monetary policy does not have the ability to impose lower interest rates. This is because of other factors, which may have an effect such as consumption or the level of demand among clients. Furthermore, the regulation lacks accountability and can even lead to inflation due to its effect on spending.
Supply Side Policy
The Supply Side Policy has an advantage on the price. Accordingly, if the specific regulations functions successfully, it may actually lead to a considerable fall in the prices of products and services. Nonetheless, the only disadvantage of the policy concerns its susceptibility to government control. Simply put, it is impossible to know whether the implementers of the regulation will actually decrease the prices. In addition to this, it may also be difficult for consumers to purchase more commodities and services irrespective of a probable decrease in the prices.