Sustainable Economic Growth

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Level 2 Economics Achievement Standard 91227 Analyse how government policies and contemporary economic issues interact An introduction that describes what sustainable economic growth is and why it is desirable for households, firms and government Sustainable economic growth is a rate of growth that can be maintained by the economy without causing any major economic problems. Economic growth occurs when changes in 3 determinants occur including real GDP/ income increasing, Productive capacity increasing and an increase in net social welfare. Sustainable economic growth is desirable to households as household incomes increase as employment increases or the number of hours worked increases, to keep up with the demand for labour in times of economic …show more content…

A policy the government could implement in addition to the other policies mentioned earlier is monetary policy. Monetary Policy is the use of the official cash rate (OCR) in order to maintain price stability and control inflation. The Reserve Bank of New Zealand is responsible for monetary policy and is required to keep inflation between 1 and 3% with a focus on 2% over the medium term. This has been decided upon by the Minister of Finance Bill English and the Reserve Bank governor Graeme Wheeler. Monetary policy involves making changes to interest rates in bank settlement accounts within the Reserve Bank and other banks such as Westpac and ASB. These interest rate changes will then be spread from other banks onto borrowers and savers and cause changes within the economy. If inflation is expected to rise the Reserve Bank will implement a contractionary/ loose monetary policy. This involves increasing the OCR in order to increase interest rates, increase savings and decrease borrowing. This will then flow on to impact the aggregate demand equation as households will be putting more of their household incomes into banks to save or will be spending more in paying off loans and mortgages; …show more content…

For example a disadvantage of this policy is that Real GDP decreases which decreases growth, this is not what the government wants to achieve but if the OCR is increased at a smaller rate than the government increases its spending it will cause inflation to not increase at fast rates and also will achieve economic growth; although this growth will not be as great as if only an expansionary fiscal policy was implemented but there will be less inflation occurring too and this will cause the growth within the New Zealand economy to be more sustainable as it is easier to maintain. I propose that the economic growth will be easier to maintain, as it will not cause as many economic problems as if a fiscal policy was implemented alone. There will still be an increase in employment, economic growth and a slight increase in the price

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