Fiscal and Monetary Policies in Nz

Case:

Several economists and business analyst have stated that fiscal and monetary policies pursued over the last decade in New Zealand, particularly during the period of 2005 to 2008, were not conducive to economic growth, but only led to a customer spending spree with borrowed money, eventually pushing the economy into recession by the first quarter of 2008.

Between the year of 2002 and 2004, it was a period of economy boom for New Zealand. The real GDP was increasing about 4% each quarter of the years. After the boom period, the economy of New Zealand started growing slowly; the percentage change of real GDP started decreasing each quarter of the year. After 2008, New Zealand started going into a recession period, there was a negative percentage change of real GDP. It means the real GDP decreasing each quarter of the year.

First we need to understand some of the economic terms that using through of the whole essay. Real Gross Domestic Product (real GDP) is the production of goods and services valued at the constant prices (2). The percentage change of the real GDP over a period of time will show the trend of the economy growth of a country. If there is an increasing trend of the percentage change in real GDP, it means the economy is going on a boom period, but if there is a decreasing trend, then the economy is going on a recession period. Inflation is an increase in the overall level of prices in the economy (2). It means people need to spend more moneys to keep the same standard of living. Fiscal policy is the setting of government spending and taxation by government policymakers (2). Monetary policy is the setting of the money supply by policymakers in the central bank (2).

In an open, free and no interrupt market, the economy growth will keep increasing or decreasing. It will cause the economy going into inflation if the economy growth keeps increasing or deflation if the economy growth keeps decreasing. People do not want to that happen, because inflation will cause the overall price level increase, deflation will cause the unemployment rate increasing. Government need to take some actions or policies to stabilise the economy if there is an inflation or deflation. Fiscal policy and monetary policy are common policies used by the government to stabilise the economy.

Government expenditure and government taxation are the two main instruments of the fiscal policy and changing the level of two instruments can impact on the aggregate demand and distribution