ADM 614 Topic 8 DQ 1

Discuss what institutions and government policies promote economic growth. Explain how these institutions incentivize economic activity.

Answers:

Economic growth refers to the increase in the capacity of an economy to yield more goods and amenities compared from one period of another. An economy that is growing can make more goods and services than it used to before. Various government policies promote economic growth. These policies involve either man increase in cumulative demand or supply. Policies that affect demand are more important during a recession while supply side strategies are essential when defining long-run growth in productivity. Examples of demand policies include monetary policy, Quantitative easing, fiscal policy, devaluation.

Monetary strategy is the most common policy that influences economic activity. The government can reduce interest rates which reduce the incentives to save. Quantitative Easing entails increasing the money supply and buying of bonds, so that make the bond rates low. Fiscal policy is a government policy where the government boosts demand by reducing tax and raising public policy. An increase in government spending creates more jobs and hence increases stimulus.

Flexible labor markets are also another government policy that promotes economic growth. Markets that are highly regulated hinder companies from employing. Markets that are more flexible provide long-term boost investment. Lower Income taxes –The government tries to lower income tax so as to increase labor supply. When income tax is reduced people, get encouraged to work more and hence improve the economy. Better international relationships are also a government policy that makes the economy to grow. Robust and collaborative relationships promote efficient production processes. Institutions that promote economic growth are such as the World Bank as well as the International Monetary Fund (IMF) through the regulation of money supply ( Acemoglu, 2009).

References

Acemoglu, D. (2009). Introduction to modern economic growth . Princeton: Princeton University Press.