𝗣𝗼𝗹𝗶𝗰𝘆 𝗗𝗶𝗹𝗲𝗺𝗺𝗮

𝗗𝗲𝗳𝗶𝗻𝗶𝘁𝗶𝗼𝗻: A dilemma is a situation where it is difficult to make a decision because either way one is worse off. Typical example such as having to choose between spending time with family or spending with friends. Suppose one decides to spend time with family one has forgone the satisfaction they could have yield spending time with friends, and vice versa.

Implementing policies can also instigate a dilemma having that there is a trade-off of economic variables. This dilemma is mostly caused by The Demand Management policies, which are Fiscal Policy and Monetary Policy.

𝗖𝗼𝗻𝘁𝗿𝗮𝗰𝘁𝗶𝗼𝗻𝗮𝗿𝘆 𝗣𝗼𝗹𝗶𝗰𝘆

When the Economic has a high and unstable growth, the Monetary and Fiscal Policy intervene by for instance increasing repo rates and reducing government spending respectively. Although this lowers inflation, it increases unemployment, and given that domestic interest rates have increased the local currency tend to appreciate causing a decrease in net exports as local exports have become relatively expensive for trading partners.

𝗘𝘅𝗽𝗮𝗻𝘀𝗶𝗼𝗻𝗮𝗿𝘆 𝗣𝗼𝗹𝗶𝗰𝘆

Suppose there is a low economic growth and the government intends to boost the economy by increasing Government spending while reducing taxes, it is a subtle because a deduction in taxation means a deduction in government revenue. There are two ways the government can finance its spending: through borrowing from the Central Bank or International Monetary Fund. Borrowing from the Central Bank, however, tend to increase interest rates, lowering investment spending. While through international borrowing increases sovereign debt, having a nation in debt for almost a decade, mostly for developing countries. On the Monetary side, reducing repo rates would discourage foreign investors as low interest rates mean lower investment returns. Critical while decreasing unemployment, this increases inflation.

#SummarizedEconNotesChallenge #PolicyDilemma

#Macroeconomics #ContractionaryPolicy #ExpansionaryPolicy #FiscalPolicy #MonetaryPolicy