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Discuss the Governmental policies to improve macroeconomic scenario in order to showcase the importance of the governmental intervention in the economy.

Debate on Government Intervention in the Market Mechanism

There has been long-standing debate regarding the fact that whether the government should intervene in the market mechanism or it need to refrain itself from it for the better growth prospect of the economy. Though the different economists showcased different view regarding the government’s intervention policies, however, most of them have refrained from drawing the line of final verdict (Borner et al. 2016). During the period of great depression in order to showcase the importance of government intervention in the market economy Keynes strongly argued for the demand management policy (Brady 2018). Contrary to this, the historical economic idea regarding the market mechanism shown by the Smith, argued in favour of the refrainment of the government’s intervention for the better growth prospect of the economy (Averitt 2017). Thus, it can clearly be seen that different economists of different time have provided different view regarding the governmental intervention in the market mechanism. Under this context, this report is aimed to analyse whether the government does more harm than good with its interventionist policy or not.  In addition to this, this report is aimed to discuss the Governmental policies to improve macroeconomic scenario in order to showcase the importance of the governmental intervention in the economy.

As it can be seen that most of the previous researches have showcased that it is subjective in nature that whether the government should intervene in the market policies or not and it largely depends upon the market structure of the respective economy. However, through the theory of the Keynes, it can be seen that government should intervene in the market because it is one of the major resort that can entice the market demand and lead the economy towards growth (Bond and Goldstein 2015). Through the AD-AS model, it can be seen that as the demand rises, it can effectively enhance the productivity of the economy and lead the economy to further growth in long run. LRAS being considered as fixed, if demand management policies can be utilised, then it would effectively boost the growth of the economy (Lemaire 2017).

Figure 1: AD-AS model

Source:  (Brady 2018)

Considering the figure 1, it can be seen that, as the government takes expansionary policies, then it shifts the demand curve towards rightward from initial AD1 to AD2. Under this situation, as the demand rises, the price also rises, leading to rising in the supply of the output. This rise in the output can be depicted through the shift of the LRAS curve (Long Run Aggregate Supply curve) from LRAS1 to LRAS2 (Evans 2016). As the demand policies utilised by the government to intervene the market, it not only aids the economy to have higher output. Additionally, it aids the government to influence various other macroeconomic factors too.

Analysis of Governmental Policies to Improve Macroeconomic Scenario

As the market faces reduced price, with the shift in the LRAS, it reduces the inflation rate too. With lower inflation rate, the purchasing power of the population gets enhanced that enhance the livelihood of them too. In addition to this with the higher amount of demand, governmental demand management policy enhances the scope of employment. As the demand rises, prices of the goods and services in the economy also rises, and it provides the required amount of stimuli to the firms to employ more amount of employee (Miller and Rose 2017). Thus, with the governmental policy to intervene the market, it reduces the unemployment in the economy. Additionally, it has also been observed that through the utilisation of the demand management policies by the government it entice the export capabilities of the firms through generating higher output in the domestic economy. With the rise in the export, the balance of trade also rises leading to better economic position for the country (Mehar 2018).

One of the main benefits of governmental demand management policies is that, during the recessionary situation, government plays a crucial role in controlling market function through its demand management policies. As it can be seen that in such recessionary condition government provides subsidies and protection to the domestic industries so as to make them potential enough to compete with the foreign traders and drag out the economy from the recessionary situation through generating higher employment, raising the income level of the population and so on (Pasquariello 2017).

As the mechanism of demand-driven market controlling mechanism, the government takes fiscal and monetary policies, which are useful to change the demand and supply prospect of the economy. Through utilisation of these policies, the government aims to drive the demand of the economy. Policies like taxes, subsidy, and quota are often used by the government to keep the market rolling and saves it from the breaking down (Kingstone 2018). Thus, considering these, it can be stated that government intervention with demand driven policies does’s good rather bad. However, there is different perspective too.

As it can be seen that various economists have opined that it is essential for the government to intervene the market with the demand management policies, however, there are multiple economies from the classic view of the economy who believe government intervention instead deteriorates the free flow of the economy.

According to the classic view of the economy, supply creates its own demand, and government intervention is not necessary for the purpose. It is often argued that with the demand management policies it become hard for the government to control the free flow of the economy because the higher amount of governmental intervention makes the personal freedom lower (Cohn 2016). As well as it is also seen that under the purview of global warming, firms are forced to reduce their production and entitled to generate only socially optimised amount of goods and services. It deteriorates the producer surplus through restriction the production as well as the consumer surplus is also become constrained due to the rise in the price of the goods and services with the lower output level. Additionally, it is argued that the market become biased with the political influence on the firm that forces them to produce those goods and services, which are favourable for production to a specific group of people.

Benefits of Governmental Demand Management Policies

It is argued by the researchers that with the intervention of the government through the demand management policies, reduce the diminishing marginal returns to income, which enhances the preference of the workers over the leisure rather than working leading to falling in the production of the economy. Market under the governmental control has a higher amount of jibe of the bureaucracy that reduces the growth of the industries in biased ways. Furthermore, it has also been argued by the real business cycle theorists that the government intervention over the market, does not really impact the length of the recession and inflation instead deteriorates the situation further with the implementation of the stringent laws and norms of business operation (De-xue and Ding 2015). Thus considering the negative views regarding the governmental intervention in the market, it becomes harder again decide whether government do harm or good to the economy with its demand management market intervention policies.

As the policy to intervene the market with the demand is driven strategies government either consider the fiscal or monetary policies. For instance, if there is fall in demand due to the fall in the productivity, then the government will take monetary policy so that it can entice the market with higher liquidity in the economy (Carpenter et al. 2015). As the liquidity in the economy enhances purchasing power also increase so does the demand. With higher demand, there will be higher productivity, and the employment generation will be aggravated making the situation good for the economy. On the other hand, if there is fall in demand, then the government will take expansionary fiscal policies which will enhance the supply side market, leading to falling in the price of the goods and services (Alston and Okrent 2017). This fall in the price will further enhance the purchasing power of the people leading to rising in demand and through the cyclical way, it will push the economy to move forward.

Though these policies are sound, however, it has drawbacks too. For instance, if the government takes expansionary monetary system, then it will reduce the interest rate and so does the foreign investment, leading to falling in the overall productivity of the economy. If the government chose a contractionary monetary policy, then it will allow the interest rate to soar. However, the inflation rate will eventually rise (Summer 2016). On the other hand in the case of expansionary fiscal policy, there will be fall in the producer surplus, and if the government impose a tax on the particular good, then it will lead to a deadweight loss. In the case of contractionary fiscal policy, it will increase the price level leading to inflation and weak purchasing power resulting in fall in the standard of living.

Criticism of Governmental Intervention in the Market Mechanism

Thus, policy mix of the government plays a crucial role in determining the flow of the economy. If the government can utilise the demand management policy correctly, then it can really help the economy to grow, however, if it fails to do so, there will be fall in the output and the economy will find itself on the verge of the destruction (Inchausti-Sintes 2015). Though it has been argued by the various researchers that the supply creates its own demand, 21st century has ruled out the same, where open market is mostly controlled by the policies. Without the governmental intervention, the economy can face a stringent force that can cripple down the performance of the economy and lead it to break down.

Conclusion:

From the above discussion, it can be seen that the there is still dilemma regarding whether the government should intervene the market with the demand-driven policies or not. However, from the comparative analysis of the phenomenon, it can be seen that it would instead be good to entail that governmental intervention with the demand policies is good for the growth of the economy. It aids the market to face higher increase with the rise in the demand of the goods and services and additionally it safeguards the economy from breaking down under the competitive edge of the foreign market players. The report has found that, though it was previously believed that, demand-side policies do more harm to the economy due to its externalities, however from this report it can be seen that government should intervene more because it will ensure future growth of the state. Additionally, it will provide sustainability to the economy and better extension to the employment status of the economy. To conclude it can be stated that though the government intervene in the market has some negativities, yet it is essential for the growth of the economy because it will provide them ample scope to enhance its productivity.

References:

Alston, J.M. and Okrent, A.M., 2017. Introduction. In The Effects of Farm and Food Policy on Obesity in the United States (pp. 1-12). Palgrave Macmillan, New York.

Averitt, R.T., 2017. The Prospects for Economic Dualism: A Historical Perspective. In Industries, Firms, and Jobs (pp. 23-42). Routledge.

Bond, P. and Goldstein, I., 2015. Government intervention and information aggregation by prices. The Journal of Finance, 70(6), pp.2777-2812.

Borner, S., Brunetti, A. and Weder, B., 2016. Political credibility and economic development. Springer.

Brady, M.E., 2018. JM Keynes, Chapter 21 of the General Theory, and the Textbook AD-AS Model. Why Keynes's Suggested Simplifications to His Aggregate Supply Curve Approach in Chapter 21 of the General Theory Were Overlooked.

Carpenter, S.R., Booth, E.G., Gillon, S., Kucharik, C.J., Loheide, S., Mase, A.S., Motew, M., Qiu, J., Rissman, A.R., Seifert, J. and Soylu, E., 2015. Plausible futures of a social-ecological system: Yahara watershed, Wisconsin, USA. Ecology and Society, 20(2).

Cohn, T.H., 2016. Global political economy: Theory and practice. Routledge.

De-xue, L.I.U. and Ding, C.H.E.N., 2015. Government Intervention Ability Difference and Business Cycle Co-movement: An Empirical Study Based on China and Its Major Trade Partners. Journal of International Trade, 5, p.004.

Evans, A.J., 2016. A Dynamic AD-AS Analysis of the UK Economy, 2002-2010. Journal of Private Enterprise, 31(4), p.97.

Inchausti-Sintes, F., 2015. Tourism: Economic growth, employment and Dutch disease. Annals of Tourism Research, 54, pp.172-189.

Kingstone, P., 2018. The Political Economy of Latin America: Reflections on Neoliberalism and Development after the Commodity Boom. Routledge.

Mehar, A., 2018. Impact of Monetary Policy on Growth and Poverty: Drastic Consequences of Government Intervention. Journal of Modern Economy, 1.

Miller, P. and Rose, N., 2017. Political power beyond the state: Problematics of government. In Foucault and Law (pp. 191-224). Routledge.

Pasquariello, P., 2017. Government intervention and arbitrage. The Review of Financial Studies.

Sumner, S., 2016. The Fed and the Great Recession: How Better Monetary Policy Can Avert the Next Crisis. Foreign Aff., 95, p.116.

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