Economics For Business

Explain how a government can use neo-Keynesian and classical supply-side policies to achieve long-term growth. Provide examples of such policies used by any European government

Overview

The government can be justified as an individual or group of individuals, who are leading a state, organization, and country. To develop the financial background of a country generally government of the country is implementing policies, legislation, and rules. Through the policies, a country can survive reasonably within the global state of the economy. In this study mainly reflects the Neo Keynesian and classical supply policies of a government to the long-term development of a country. Through the study implication of both policies in a different aspect of economics such as Fiscal Policy, Wage Rigidity, Unemployment, Phillips Curve, Government Borrowing and Crowding Out have been analyzed.

Discussion

Neo Keynesian economics can be justified as a process of economics, which was founded by John Hicks, Franco Modigliani and Paul Samuelson based upon the economic writings of John Maynard Keynes (Beaudry and Portier, 2018). Generally, the neo-Keynesian theory was used to measure the macroeconomic factors of a country. In the 1990s the phase of the Keynesian theory was changed, and economists also use this theory for microeconomics. In this case, a government can use this policy to develop long-term activities, which may lead a country towards the market success (Means, 2017).

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Great Canadian economist Robert Mundell has founded the classical supply policies for macroeconomic factors. The policy mainly reflects that a country can develop its economic condition if the government is controlling the taxation volume as well as regulation. The high volume of goods supply at the lowest price can engage more customer towards an organization or country. At the same time, the factors above also assist in developing employment rate within a country, which lead a country towards the market success (EconomicsHelp.org, 2016).

By the above observations, there are six major policies in regards Neo Keynesian and classical supply has been elaborated below. At the same time, how below-mentioned policies can help a government for economic growth also has elaborated to recognize the different economic condition of both theories.

Fiscal Policy

Through the fiscal policy generally, a government is influencing tax rates in order develop economic condition of a country (Gray, Lane and Varoudakis, 2007). Through this process of economic development, a strong economy has been initiating, but an issue may be arise called recession period. However, the high volume of tax rates has conducted recession period but if the government of a country has been stabilizing tax rates, then the recession period may not initiate. Moreover, Neo Keynesian and classical supply policies have reflected different viewpoints in fiscal policy these viewpoints, and its usage by a government has been below:

As above discussed that the fiscal policy can initiate recessing period within an economy. In this case, the Neo Keynesian policies reflected that the fiscal policy is encouraging a country’s company during the period of recession (Beaudry and Portier, 2018). By Neo Keynesian policies, in recession period each economic activity has been developed due to high consumption of taxes by a government. Hence, in this situation, the government of a country has benefited well. At the same time, a huge amount of money has been operating by the government. Hence, the government can invest money in different sectors, which leads a country towards the economic success, whereas government has the complete power upon privet and public sectors (Means, 2017).

In the case of classical supply policies, fiscal policy is not going to work properly on a long-term basis. A country can develop its economic condition for a short period, but in the long term, it will not provide an expected output. The main reason behind this factor is the unemployment rate. As above reflated that the recession period generally introduces through fiscal policy, whereas unemployment rate has increased. However, the high volume of unemployment means privet and public sector companies have a low number of employees to work. Hence, the volume of productivity will reduce. At the same time, the tax price of each product will increase, and most of the companies must face loss, which can introduce a corporate disaster within an economy. Hence, the government may benefit from the fiscal policy but the government also not going to achieve profitability in any sector due to high tax prices. Hence, the growth of the economy and the government will break down persistently (EconomicsHelp.org, 2016).

Wage Rigidity

Wage Rigidity can be described as a policy or process which determines the flexibility of wage within an economy (Babecky et al., 2010). Generally, economists have been using this process to measure wage increment and decrement within a country to extend industrial development. Fundamentally, the volume of wage decided based upon the economic condition or a country as well as the volume of trade. Hence, the high volume of trade will initiate a high amount of wages. In the case of unemployment, wages have been decided as per the physiological needs of the individuals.

As per the Neo Keynesian policies, downward wages are the main cause of unemployment. Hence in the long run wages can be decreased due to the unemployment rate. As above discussed, the Neo Keynesian reflect a period whereas government has benefited, and the public and privet sectors are not. Due to that reason, the volume of wage can be decreased over the period. Based on this assumption it can be asserted that the wage rigidity can help the government to receive a reasonable amount of money, but it’s not working properly due to low wage and unemployment. Through this growth of a country’s government has not been developing reasonably (Beaudry and Portier, 2018).

According to the classical supply policies wage rigidity has not been decreasing in a long period. It has been deciding and controlling by the trade unions, whereas wage volume is flexible. Through the classical supply policies, each of a public and privet sectors companies are receiving minimum wages, which reduces risks of recession and unemployment. Through this process, both the government and industrial sector have benefited reasonably. In the case of growth, the government has been growing as a feasible manner, whereas the entire country has been benefited for that. At the same time, the economic condition of a country also has been developing in a beneficial manner (Canto, Joines and Laffer, 2014).

Unemployment

Unemployment can be defined as an economic situation, whereas individuals of a country have been facing issues regarding job (Georgellis, 2015). The high volume of unemployment of country means the economic condition of a country is bad. Hence, a government of a country must control the unemployment rate to develop the economy of the country. Generally, three types of unemployment exist in most of the countries, which are cyclical, frictional and structural.

In the case of Neo Keynesian policies, a demand deficit unemployment may initiate. However, every product has own life cycle, whereas demand for a single product has been decreasing after a period (Colander and Daane, 2015). In this situation, aggregate demand for a product has decreased, and an organization is not generating expected profitability, which hampers the economy of a country. If the condition of aggregate demand is persisting over the long period, then the demand deficit unemployment has been arising, which affected badly by the government of a country. Hence, the growth of government is not performing reasonably in this policy of Neo Keynesian policies. Therefore, demand deficit unemployment is a big issue in a Neo Keynesian policy of economy (Georgellis, 2015).

On the other hand, classical supply policies reflected a natural rate of unemployment, whereas a country has been performing effectively to stabilize the country’s economy. As above discussed, in classical supply policies have been initiated a huge volume of goods supply within an economy. Hence, the high volume of goods supply can enhance organizational performance, which initiates a high scope of employment within a country. Hence, the unemployment rate is decreasing automatically due to the high performance of a country. Hence, the government of a country has received a reasonable amount of fund due to high industrial performance, which increases the growth of a government within an economy. It can be diminishing the unemployment within a nation or a country, which can be considered as a benefit for the government as well as the peoples of a country (Feiwel, 2016).

Phillips curve can be defined as a process of economics, which assists in determining the relationship between inflation and unemployment (Llaudes, 2005). However, a high amount of inflation is a major issue for any country, because the value of the currency has been decreased. In this case, unemployment is a condition, which increases and decreases upon the rate changes of inflation. Moreover, the unemployment rate of a country is equilibrium to the countries inflation.

As per the Neo Keynesian policies, a tradeoff has been conducted over a long period. The tradeoff has been occurring several times in this policy. Generally, the phenomenon of trade-off has been conducted between unemployment and inflation (Colander and Daane, 2015). However, a decision has been made through trade-off while a country has been facing issue related to quality and quantity decrement of products. Fundamentally, the process of trade-off indicates two aspects of economics, which relationship is converse. In this case, if unemployment increases then the inflation must decrease. On the other hand, if inflation increase then the unemployment must decrease. However, the incident mentioned above is conducting for a long period in Neo Keynesian policies (Gray, Lane and Varoudakis, 2007).

In the case of classical supply policies tradeoff has been conducting in a short-term period. The relationship between inflation and unemployment has been occurring conversely in the short-term period, but in the long-term period, it will be equivalent to each other’s (Canto, Joines and Laffer, 2014). In the case of governmental growth, it leads a negative impact in the short-term period, but in the long run, it will perform as a positive impact, which leads a government towards the market success. At the same time, Phillips Curve also provides stabilize economic condition, which will be beneficial for the both public and privet sector organizations of a country. Both industries can perform in a reasonable manner which assists to make a strong economy for the government as well as the peoples of a country (Babecky et al., 2010).

Government Borrowing

Government borrowing is a process of debt acquisition by a government of a country. Through this process generally, a country’s government is issuing bonds, security and market shares to maintain the economic condition of a country (Checherita-Westphal and Rother, 2010). However, borrowed money has not paid by the government in a short run. It has been paying after a long period, while the government has benefited from that money after investing within a sector. In this case, both Neo Keynesian and classical supply policies have reflected different viewpoints and policies, which affects in both positive and negative ways to the government growth.

According to the Neo Keynesian policies, the government can borrow bonds and securities in the period of the recession period. Worsening money of public sectors within the market has been diminishing through this process of government, whereas the government is helping the private sector to develop the organizational condition and mitigate issues regarding the recession (Colander and Daane, 2015). Hence, through this process of borrowings, a government of a country has been benefited as well as private sectors also feel safe and reasonably conduct business operations. Governmental growth is fully depending upon the market success of private firms. If private firms have failed to gain market success, then the government also face market failure. Based on that observation it can be stated that the process of government borrowing in Neo Keynesian policies is a risk factor, whereas the government of a country can face growth or failure (Nickell, 2006).

On the other hand, classical supply policies reflected that the government of a country takes responsibility to make a budget for the private sectors during the period of the recession period. Through this policy, the government may not receive any financial support. Hence, the growth of the government may step for a short period but in the long run government of a country may able to make a strong economy through the budget reforming, which will lead the government towards the optimum market success (Feiwel, 2016).

Crowding Out

Crowding out effect is a process of borrowing bonds increment by a government. Through this process of borrowing generally, a government of a country is borrowing bond, securities and other in a large volume (Şen and Kaya, 2014). It initiates a crowded situation within the market, which causes to increase the interest rate. Hence, the private and public sector companies have been affected for that. Discouragement has been initiated within the market, whereas the public and private sector companies are unable to invest money in different sectors.

Through Neo Keynesian policies the government is borrowing market securities, while a recession period is going on. The government of a country does not borrow a large number of marketable securities and bonds so that the private and public sector can invest in different sectors. Hence, in Neo Keynesian policies, the crowding effect is not going to occur in the period of recession. The government growth is stabilizing at this moment because the government is not increasing its debt. The volume of borrowing is limited based upon the market requirement (Means, 2017).

In the case of classical supply policies, the government of a country has acquired a large amount of market borrowing so that the government can ensure the power of private and public sector. Through this process of borrowing the government can provide an appropriate budget for the private and public sectors so that they can develop reasonably. However, the interest rate has increased due to crowding effect, but it has initiated a situation whereas the public and private sectors companies are unable to invest. However, it secures their money during the period of recession. Hence, it can be stated that the government growth has been deteriorating due to crowding effect but recession period has been diminishing in short period, which is good for the public and private sectors as well as the country economy (Fernández-Villaverde, Guerrón-Quintana, and Rubio-Ramírez, 2014).

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References

  • Babecky, J., Caju, P.D., Kosma, T., Lawless, M., Messina, J. and Rõõm, T., 2010. Downward nominal and real wage rigidity: Survey evidence from European firms. The World Bank.
  • Beaudry, P. and Portier, F., 2018. DP12604 Real Keynesian Models and Sticky Prices.
  • Canto, V.A., Joines, D.H. and Laffer, A.B., 2014. Foundations of supply-side economics: Theory and evidence. Academic Press.
  • Checherita-Westphal, C. and Rother, P., 2010. The impact of high and growing government debt on economic growth: an empirical investigation for the euro area.
  • Colander, D.C. and Daane, D., 2015. The art of monetary policy. Routledge.
  • EconomicsHelp.org, 2016. Supply Side Policies. Benefits of Supply-Side Policies. [Online] Available at:
  • Feiwel, G.R. ed., 2016. Arrow and the Foundations of the Theory of Economic Policy. Springer. Fernández-Villaverde, J., Guerrón-Quintana, P. and Rubio-Ramírez, J.F., 2014. Supply-side policies and the zero lower bound. IMF Economic Review, 62(2), pp.248-260. Georgellis, Y., 2015. Regional unemployment and employee organizational commitment. In Academy of Management Proceedings (Vol. 2015, No. 1, p. 12430). Briarcliff Manor, NY 10510: Academy of Management.
  • Gray, C., Lane, T.M. and Varoudakis, A., 2007. Fiscal policy and economic growth: lessons for Eastern Europe and Central Asia. The World Bank.
  • Llaudes, R., 2005. The Phillips curve and long-term unemployment. Means, A.J., 2017. Generational precarity, education, and the crisis of capitalism: Conventional, neo-Keynesian, and Marxian perspectives. Critical Sociology, 43(3), pp.339-354. Nickell, S., 2006. A picture of European unemployment: success and failure. In Structural
  • Unemployment in Western Europe: Reasons and Remedies, CESifo Seminar Series, MIT Press, Cambride (pp. 9-51). Şen, H. and Kaya, A., 2014. Crowding-out or crowding-in? Analyzing the effects of government spending on private investment in Turkey. Panoeconomicus, 61(6), pp.631-651.

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