Government Policies to Promote Economic Growth

Types of Economic Growth

Short Run vs Long Run: Understanding the difference between short-term and long-term economic growth.
- Short-term Growth: Increases in growth immediately, usually by increasing aggregate demand (AD).
- Long-term Growth: Sustainable growth over a longer period, typically targeted through supply-side policies.

Objective: Increase Aggregate Demand (AD).
Methods:
- Expansionary Fiscal Policy:
  - Increase in government spending.
  - Reduction in taxation (income tax, corporation tax).
- Expansionary Monetary Policy:
  - Reduction in interest rates.
  - Reduction in the exchange rate.
  - Increase in the money supply.
Diagram Analysis:
- AD curve shifts to the right, showing growth from Y1 to Y2.
- Potential for dual effect on Aggregate Supply (AS).
- Risk of demand-pull inflation (P1 to P2).

Initial Level of Economic Activity: More spare capacity increases effectiveness.
Consumer Confidence: High confidence can drive growth.
Size of the Multiplier: Larger multipliers mean less fiscal/monetary intervention needed.
Length of Time: Time delay in seeing the effects of policies.

Objective: Increase Long-Run Aggregate Supply (LRAS).
Supply-Side Policies:
- Policies shifting LRAS to the right, increasing potential growth from Y1 to Y2.
Diagram Analysis:
- Increased potential growth and actual growth from Y1 to Y2.

Dual Effects: Potential simultaneous increase in AD and LRAS.
Time Frame: Long-term policies take much time to have an effect.
Cost: High cost and opportunity cost associated with these policies.
Initial Economic Activity Level: More spare capacity means greater need for AD increase.

Short-Run Policies: Typically demand-side (expansionary fiscal and monetary policies).
Long-Run Policies: Typically supply-side policies.
Both Carry Challenges: Different timelines, costs, and potential inflationary effects.

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