Although a fiscal policy does achieve in helping the economy for a short period of time by affecting the elements of aggregate demand namely investment and consumption it does have several problems that hinder its effectiveness.
On the one hand as previously stated an expansionary fiscal policy by decreasing taxation and increasing government spending the fiscal policy will probably achieve in increasing aggregate demand. This will happen since the decrease in taxation will increase people’s disposable income and consequently depending on the marginal propensity to consume the domestic consumption of an economy which in turn will increase aggregate demand. Similarly the government by increasing spending in all sectors of its economy it will increase investment which in turn may lead to an increase in aggregate demand. This is an effective way to combat economic problems such as unemployment and recession. On the other hand if a government wants to eliminate recession it will have to pursue a contractionary demand side policy. This policy will increase taxation thus decreasing the citizen’s disposable income thus in turn reducing consumption which will reduce aggregate demand which will in turn reduce inflation. On the other hand it will decrease government spending thus decreasing investment which will again reduce aggregate demand and thus in turn reduce inflation.
The Essay on Cross elasticity of demand
A. Discuss elasticity of demand as it pertains to elastic, unit, and inelastic demand. Elasticity of demand is gauged by the percentage of change in demand when the price of an item varies. If the change in the quantity demanded is greater than 1 the demand is elastic. Elasticity of demand is calculated by ED=quantity demanded/decrease in price. If you reduce the price of milk by 6%, and that ...
However these policies aren’t always very effective for several reasons. Firstly fiscal policy can’t be effective if consumption isn’t effective to tax changes in other words if there is a high marginal propensity to consume. What this will mean is that no matter how high the government raises taxes the people will still insist on spending as much as they previously did thus not decreasing domestic consumption. On the other hand if there is low marginal propensity to consume no matter how low the government drops the tax domestic consumption wont increase and thus domestic consumption wont increase.
Moreover a fiscal policy could lead to the crowding out effect. This is divided in two categories, resources and financial crowding out. In the case of resources crowding out this indicates an increase in reward for the factors of production. This happens in the case of an expansionary fiscal policy government spending on public and merit goods as a result the government increases demand for specific factors of production. This increased demand will lead to increases in wages, rent and interest rates. In the case of financial crowding out increased government spending will lead in an increase in demand to borrow money so as to finance this spending. As a result there will be an increase in interest rates which in turn may discourage investment from private firms.
Another problem that may occur is that the government may over or under estimate the problem and thus impose a non effective fiscal policy since it will either increase demand too much or too little. This may occur due to information problems seeing that information is sometimes difficult to collect on the exact position of the economy at any moment and thus may make false estimations on the extent to which the policy should be dragged. There is also the issue of time seeing that in order for the fiscal policy to be constructed this may take some time and by then the situation will be altered thus the policy wont be as effective.
The Essay on Impact of Government Policies
Using material from Item 2B and elsewhere, assess sociological views of the impact of government policies and laws on family life (24 marks) Social policies are laws made by the state to bring a change to society. As stated in item 2B different political policies have different ideologies and agendas that they will try and reinforce through the family. One example of a social policy is The Family ...
Finally there is the issue of the fiscal drag that may make fiscal policies ineffective. This happens because if the government keeps increasing government spending with taxation levels remaining stable the government may move into recession and a deflationary gap might emerge. This can be explained by the fact that people earning higher income due to an increase in government spending will move to a higher income bracket and pay higher taxation something that will reduce consumption on their part and leas the economy to slowdown instead of growth.
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