General - Economic Growth
To help the economy grow, you will need, as Chancellor, to maintain the level of demand in the economy. You can do this by using your fiscal policy and monetary policy to influence the level of demand. If you find that the economy is growing too slowly then you can try to boost demand. To do this you need to encourage spending and so you could either cut taxes or cut interest rates. Either of these will help give people more money to spend, therefore boosting demand. Alternatively, you could as a government spend more yourself - increase the level of government expenditure. These policies are all called reflationary policies
.
To increase growth you may therefore want to:
- Cut taxes (direct taxes
or indirect taxes
taxes)
- Cut interest rates
- Increase the level of government expenditure
However, tread carefully as you do this. Watch particularly the level of inflation, as if demand rises too much, firms may not be able to increase production quickly enough and prices may rise instead of output. If this happens, you may need to use deflationary policies
. These would simply be the reverse of the above:
- Increase taxes
- Increase interest rates
- Cut the level of government expenditure
Not all economists would recommend using fiscal and monetary policy in this way, though. Some argue that it will make things worse and destabilise the economy. For more detail on the views of different economists, why not visit the Library on the 3rd floor. Check out the difference between Classical and Keynesian economists for more on this debate.
Why not try these policies in the Virtual Economy to see how well they work? Click either on the 4th floor in the side panel or on the 'Model' in the top navigation bar to get to the model. Have a look at the present forecasts for the economy and decide what you think would be the most appropriate policies. Watch out for inflation though - once there, it is very difficult to get rid of!