Economic Policy Essay Example

Economic Policy 5

Economic policy


Studying the economic environment is very essential for any business to succeed and gain competitive advantage. Through studying economic policy, an organization will be able to balance its output and the input. Investment also plays a great role in the management of the economic policy. There are two approaches to economic policy and which try to explain various perspectives in the economy. These theories are the classical approach and Keynesian approach. In this regard therefore, in this essay I will discuss the comparison and contrasts of the role of investment in both classical and Keynesian approaches to economy. I will also discuss the implication of the design of the fiscal policy and monetary policy in the stabilization of the economy.

To start with, the first similarity is that investment plays a great role in the economic development in an economy (Sullivan & Steven 2003). This is because when there are many good investments in an economy, the economic output and the input will balance. Businesses will do savings and the interest rates will be low and thus business will be able to raise more revenues for their business operations hence increase the productions for export to balance with the imports. This helps to improve the economy of a nation.

The other similarity is that in both approaches, investment helps to develop other auxiliary services in the business. The auxiliary services include the banking system, the insurance sector and the infrastructure (Sullivan & Steven 2003). This enables the economy of a country to grow. These services will develop because the investments have to reduce their risks by insuring their business, they will need the banking services and there will good systems of communication and transport.

On the other hand, there is the similarity of creation of employment opportunities. Through investments, there will be opportunities for employment because the investments will need human skills to work there. Through creation of employment opportunities, the government will increase its revenue collection and invest in other sectors of the economy like the education and health services which will ensure improved living standards of the people.

There are also differences between the classical approach to economy and Keynesian approach. The first difference is that in classical approach to economy, investment plays the role of protecting the consumers from exploitation (Keynes 2007). This is because when there are many investments in an economy, classical economists argue that there will be competition between firms and the consumer will benefit through low prices. This is done because the classical approach that the market is free and regulates itself with no government intervention. In the Keynesian approach to economy, investment plays the role of reducing the interest rates. The interest rates will be low when there are many investments because the government will raise more revenue hence the taxation rate will be low.

In the classical approach investment helps to improve the wages and salaries of the employees because many firms will be competing in the market hence will also compete for the human skills which implies that better paying firms will get best human skills (Keynes 2007). With the Keynesian approach, investments do not improve the wages of the employees because there is the intervention of the government which regulates the compensations for each category of jobs.

Implications of designing monetary and fiscal policies

These are the tools that are used to stabilize the economy of a country by managing inflation. Through the fiscal policy the government is able to manage its economy by analyzing the expenditure and taxation (Elmendorf & David 2002). When the government’s expenditure is higher than the tax it collects from the taxpayers, it will increase the tax so as to raise the extra revenue that it is spending. On the other hand if the government spending is less than what it collects then it will lower the taxation rate and the tax payers will be released off their burden. When the revenue collection is higher than expenditure will enable the government to design a surplus budget to increase its expenditure and provide better services.

The fiscal policy also enables the government development purposes. Through the fiscal policy, the government will be able to know the growth rate of its economy (Elmendorf & David 2002). A good economic growth is seen when most of the projects are accomplished by borrowed funds to imply that the private sector cannot be able to grow the economy and therefore they have to borrow. In this way the government is able to develop the economy.

On the other hand, monetary policy also enables the investment rates by appropriately determining the interest rates. A stable economy ensures that there effective and sustainable money supply. When there is excess supply of money in the market, there will be inflation and when there is too little supply of money the businesses will not be able to access credits to invest (Corsetti & Pesenti 2005). When there is fear of inflation, the central bank will raise the interest rates which will discourage investors from investing. The monetary policy also reduces the inflation rates by offering various securities to the public like the bonds and open market operations so as to reduce the circulation of liquid money in the market.


Based on the above findings, economic policy can be explained by two approaches which classical approach and Keynesian approach. The classical economists argue that in order for the economy to be stable, the market should be free with no government intervention. With Keynesian approach, the government has to be involved in the market operate to regulate the activities. The similarities that investment plays include stimulus for economic growth, create employment opportunities and promotes development. In addition, economy can be stabilized when there is effective application of monetary and fiscal policies. These policies help to reduce inflation rates leading to economic balance promoting investment activities.


Corsetti, G & Pesenti, P 2005, International dimensions of optimal monetary policy.

Journal of Monetary Economics, Vol. 52, No. 2, pp. 281-305.

Elmendorf, D. W & David, R 2002, «Short Run Effects of Fiscal Policy with Forward-

Looking Financial Markets.» National Tax Journal, Vol. 55, No. 3, pp. 357-443.

Keynes, J. M 2007, The General Theory of Employment, Interest and Money,

Basingstoke, Hampshire, Palgrave Macmillan.

Sullivan, A & Steven M 2003, Economics: Principles in action, Upper Saddle River,

Pearson Prentice Hall.