The Macroeconomic Policies of Austerity: What Is austerity? Explain. Give Examples.

Essay by nabhatiesCollege, UndergraduateB+, March 2007

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In economics, austerity is when a national government reduces its spending in order to pay back creditors. Development projects, welfare programs and other social spending are common areas of spending for cuts; in many countries, austerity measures have been associated with standard of living declines. Also, when countries plead for financial aid from institutions like the International Monetary Fund, they require that countries to pursue an 'austerity policy'. The government is asked to reduce public spending and stop issuing subsidies. In order to implement these austerity policies, governments have two key instruments: monetary and fiscal policies. These two key instruments are used to bring inflation to required levels; however, this leads to high levels of unemployment, government deficits, privatization of nationalized industries and labor market deregulations in the economy of a country.

IIKey Economic Instruments

In every country, government has a responsibility to have low inflation rates and as well as consistent economic growth in the economy.

Inflation rate and economic growth can be controlled by stringent monetary policies applied by national financial institutions of that country (ex Federal Reserves or Bank of Canada). Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy is generally referred to as either being an expansionary policy, or a contractionary policy. Where an expansionary policy increases the total supply of money in the economy, and a contractionary policy decreases the total money supply. Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates, while contractionary policy has the goal of raising interest rates to combat inflation.

IIIMonetary Policy

In mid 1970's the government was unable to determine which policies should be exercised to reduce rising...