Policies to Promote Economic Growth
- If the economy is producing below full capacity, then expansionary fiscal or monetary policy can increase AD, and thus increasing output
- The advantages of fiscal and monetary policy is that they can often both stimulate both AD and AS
- Lowering the rate of interest will both stimulate consumption and investment, and it is the investment that will increase AS
- Government spending on things like education can also move AS to the right.
- For long-run growth to be achieved, the quality and/or quantity of resources has to increase
- This is what SSPs tried to achieve
- The measures that raise investment will therefore also raise AS
- Most government want stable growth, and this is for actual growth to match trend growth, where the trend growth rises over time.
- Governments will want to avoid AD increasing faster than the trend growth permit, as this will cause overheating with inflation in the economy and balance of payments problems arising
- Governments will also prevent AD increasing slower than the trend growth rate, since this would result in a negative output gap.