Explain the effects of Policy on the Composition of National Output.

Explain the effects of Policy on the Composition of National Output.

Monetary policy is time and again seen as something of a blunt policy instrument - affecting all sectors of the economy although in different conduct and with an uneven impact. On the contrary, fiscal policy can be besieged to change certain groups (e.g. increases in benefits for low income households, reductions in the rate of corporation tax for small-medium sized enterprises, investment allowances for businesses in certain regions)
(i) Monetary policy expansion Lower interest rates lead to an increase in consumer and business capital spending both of which increases national income. As investment spending results in a larger capital stock, then incomes in the future will also be higher through the impact on LRAS.
(ii) Fiscal policy expansion An extension in fiscal policy (i.e. an increase in government spending) adds to AD but if financed by higher government borrowing, this may result in higher interest rates and lower investment.

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Kavungya answered the question on April 30, 2019 at 11:13

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