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Microeconomics

Name

Institution
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Introduction

I have worked in the finance and treasury department at Econland for several years as a

policy adviser and economist. In my capacity as policy adviser, I have helped to inform decisions

to achieve macroeconomic goals, including price stability, full employment, and growth. This

simulation report reflects fiscal and monetary policy changes in the country. 

Government Spending, Taxation, and Employment or Stability

The fiscal policies, including government spending and taxation, were also critical in

shaping macroeconomic growth. During the high unemployment rate, the government increased

its spending to drive productivity and employment in the economy (Mankiw, 2021). When the

real GDP was low and unemployment high, the government increased its spending. For example,

government spending was highest in years when the real GDP growth was the lowest, and vice

versa. Likewise, the government lowered taxes to encourage investments during low economic

productivity to boost investment (Mankiw, 2021). When the inflation rate increased, the

government hiked the taxes and reduced the expenditure to discourage overconsumption.

Therefore, this restores the economy to equilibrium consistent with Keynesian economics.

Interest Rates and Inflation

Interest rate changes impact the inflation rate. In the first two years, the government

headed to my advice and increased the interest rate. The decision to increase the interest rate was

consistent with Keynesian economics (Chan et al., 2017). According to Keynes, the government

must intervene in an economy with appropriate tools to drive economic prosperity or stabilize the

economy (Mankiw, 2021). Thus, during a high inflation rate, the government must use various

policy tools, including increasing the interest rate. 

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In Scotland, the government increased the interest rate lowering the inflation rate to

nearly 2% in the first year. However, the government must intervene during a period of low

economic productivity by lowering the interest rate. In the second and third years, the

government reduced the interest rate to increase the money supply (Mankiw, 2021). Lowering

interest rates encouraging the households and companies to borrow money for consumption and

investment, respectively. As a result, this stabilizes economic productivity in an economy

restoring the equilibrium at full employment. In the fourth year, the government slightly reduced

the interest rate when the money supply exceeded the set equilibrium stabilizing the aggregate

prices in an economy (Mankiw, 2021). Therefore, this reduces over-inflation that could negate

purchasing parity in an economy.

In the fifth and sixth years, the government consecutively decreased the interest rate to

increased money stability and restored full employment (Mankiw, 2021). Therefore, people,

including households and businesses, borrowed to sustain economic growth. Growth in

borrowings strengthened economic stability and productivity. Effective growth in productivity

restored the economy to equilibrium (Chan et al., 2017). Growth in the jobs, improving their

buying power. However, the rising inflation in the seventh year pressured Econland to lower the

prices by increasing the interest rate. 

Summary

In summary, the interest rate is an effective monetary tool to stabilize an economy. The

government adjusts interest rates downwards to encourage borrowing during low economic

productivity. During high economic productivity and unsustainable inflation, the government

adjusts the interest rate downwards to discourage borrowing and improve economic growth and

performance. Likewise, the government lowers taxes and increases spending (expansionary fiscal
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tools) to drive productivity and restore the economy to full employment and vice versa.

Government spending is lowest, and taxes are highest when the inflation and money supply are

beyond the equilibrium. Scotland's case shows how governments use policy mix (fiscal and

monetary) tools to inform economic stability. 

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References

Mankiw, N. G. (2021). Principles of economics (9th ed.). Cengage Learning.

Chan, S. G., Ramly, Z., & Karim, M. Z. A. (2017). Government spending efficiency on

economic growth: Roles of value-added tax. Global Economic Review, 46(2), 162-188.

http://dx.doi.org/10.1080/1226508X.2017.1292857