Section 3.3 and 3.4 Formative Reflection

In studying Supply-side and Demand-side policies in lessons 3.3 and 3.4, I was able to learn a lot about the effects of government intervention through both fiscal and monetary policies in the economy. A fiscal policy is a policy enacted by the government to alter taxes, spending, and the flow of capital. By raising or lowering taxes while increasing or decreasing government spending, fiscal policies are able to regulate an economy’s demand. Additionally, by controlling the flow of capital in an economy with payouts, a government can regulate an economy’s supply as well. A monetary policy is a policy that alters the interest rates in an economy. This can increase or decrease the consumer’s disposable income, thus regulating the demand within an economy.

Neoclassical economics argues that governments should have limited or no intervention in the economy, and that any intervention only serves to worsen the state of the economy. Contrary to this, Keynesian economics argues that governments should play an active role in regulating an economy’s supply and demand. In the formative examination, I scored myself with an 8/10. I did this feeling I had a strong  understanding of the macroeconomic concepts discussed in class. I was able to identify how demand and supply adjustment were able to create inflation in an economy. In my analysis of the situation however I failed to provide real world examples to link my knowledge of the concepts to the real world. I believe that in the upcoming summative assessment I will provide examples to show how my understand is applicable to the modern world.

Unemployment and Economic Freedom

The neoclassical argument in economics is that government intervention in the market isn’t necessary. The idea that neoclassical economists express is that government intervention leads to a rise in unemployment. There is strong data supporting this argument, as the economy of Singapore is the world’s second most unregulated government and has an astonishingly low 2.1% unemployment rate. Contrary to this, Zimbabwe has a very controlled economy, and as such has an extensive 95% unemployment rate. Using this data, neoclassical economists argue that government intervention in the market only produces detrimental results.

Investment Surges in Renewable Energy

Trends in 2010 have lead to an increase in investment for renewable energy by around 34%. An investment in renewable energy by a government would affect the economy’s aggregate supply (AS). This is because with renewable energy, there will be a decrease in production costs, a factor of the AS curve. By saving costs in the production phase by reusing resources, forms will have more capital to spend of increasing production and expanding. This will lead to a shift to the right for the AS curve as the total production possibility of the economy increases. This shift will lead to a drop in average prices and an increase in Real GDP as the economy produces more. This decrease in average prices can be seen in Figure 1 as the shift from P to P1. Additionally, the increase in Real GDP can be seen as a shift right from Y to Y1. This will most likely lead to an expansion in economic capacity in the long run as there is less spending on long term production costs, leading to an increase in production and therefore in a rise in Real GDP in the economy.