2. ECONOMIC POLICIES

The economists (we?) usually suppose the economy is naturally balanced,

Our first and lovely country is made only by shoes. People only eat and consume shoes: in the morning some shoes are smeared with shoes, shoes for lunch, in the office you make shoes, and your are paid to buy more shoes to consume an dress… Well, the amount produced and consumed is balanced. There’re no shoes to spare, in our country we all eat every shoe.

That means we are not in crisis, our exports are equal to our imports, the Government earns the same as it expends, there is no unemployment (beyond the structural”)…

But a real economy cannot live separated to the reality and this equilibrium situation does not exist at all. This is an economic utopia.

In order to reach this equilibrium (a harder concept of eq., reduced to “reach all the government goals”) policy-makers use two kind of policies (already known by everybody).

                -Monetary policy. We are in the EMU (Euro Area) and our economic policy does not depend of the countries’ decision, rather in the ECB decisions. Thus, with the aim to understand these basic lessons, let’s imagine that God bless America, this is the home of the brave, we love burgers and the American dream is having a The Simpson’s house. Hence we all are from US.

Monetary policy means basically just one thing: changing the interest rate:     

                I’m applying for a loan for my life’s dream: creating an army of cats. The banker tells me I’ve to give him back €120 instead of the €100 borrowed. So the interest rate is 20%. Next day , after the ECB has noticed the interest will fall through a monetary policy I go again to the bank and I’m told now I’ve to pay just €110 for my €100 borrowed… That sounds better for your plans to conquer the world and, therefore, the lowering in the interests rate is good!

Decreasing interest rates leads to an improvement in the short-run economy.

-Fiscal policy: those are closer for everyone, no? They’re these that the gov undertakes and are related with their income and expenditures.

INCOME: TAXES (if they increase, the govern accounts are better off, and we, the population, are worse off)

EXPENDITURES: public expenditure, for instance, politics allowances, Prime Minister trips, health, education, national army… the whole amount of money that comes from the State (Beware! Pensions and unemployment aids are not accounted for Public Expenditure).

Empirically, the most rational idea is that the increasing in expenditures (expansionary fiscal policy) improves the country situation and vice versa.

And here is the beginning…