• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Suppose a government wishes to reduce the level of consumption expenditure in order to reduce inflationary pressure in an econ

Extracts from this document...

Introduction

Suppose a government wishes to reduce the level of consumption expenditure in order to reduce inflationary pressure in an economy.Explain how Fiscal Policy might be used to achieve this objective and comment upon how effective such a policy may be in reducing inflation. Fiscal policy aims to control the economy and manage the level of aggregate demand in he economy by the use of Taxation and Government Spending. Inflation is the sustained increase in the general price level. Fiscal policy might be used to reduce the level of consumption expenditure in order to reduce inflationary pressure in an economy. Slowing down the economy can lower government spending. As government spending is one of the four elements of AD and a decrease in it will lead to a decrease in the total demand in the economy. ...read more.

Middle

This would decrease the consumer-spending element of AD and therefore it would lead to a decrease in AD. This would stop a sustained increase in the general price increase. I.e. Inflation. If Indirect Taxes increased, then the price of a good will also increases. This means that consumers will be unable to buy the same basket of goods as they normally can because of the increase in price. If this were to happen, inflation would be stopped because the total demand of goods and services (AD) has decreased. In addition, as indirect taxes are taxes on spending, there would be an increase in inflation; therefore, it would be better to use supply side policies to reduce inflation in the end. ...read more.

Conclusion

If we consider the classical economists view on contractionary fiscal policy, where there is a tightening of fiscal policy, then output would not be affected due to the vertical LRAS curve, however there will be changes in the price level. The shift to the left in the AD curve, due to decreased consumer spending shows, according to classical economists that there will be a decrease in inflation in the long run, and the output will remain constant. The Keynesian economists view of contractionary fiscal policy can be shown below. The Keynesian view suggests that at, full employment, a decrease in AD, from AD to AD1 will lead to a fall in the price level and hence reduce inflation, however there will be no effect on Real GDP. However if there are unemployed resources within the economy the only effect a reduce in AD would have would be a decrease in output. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Macroeconomics essays

  1. Peer reviewed

    Examine two reasons why a government might wish to control increases in its expenditure

    3 star(s)

    This situation does not occur by accident, and money from the surplus is often used to pay off debt incurred from deficit budgets from the past. A deficit budget is where government expenditure is higher than the money received from taxation.

  2. What are the government objectives? Explain why each is important and how the government ...

    Therefore many companies as they are making less profit or revenue may have to let workers go to reduce costs or prevent them from employing additional employees as this will reduce profits and increase costs even further. I will now look at how the government can achieve equilibrium in the

  1. "Government spending is the enemy of employment in two ways. First government borrowing is ...

    Government borrowing can discourage private sector borrowing for investment, which reduces aggregate demand and can cause unemployment. When the government borrows interests rates are high to encourage banks to lend. This in turn reduces private sector borrowing for investment. The higher rate of interest leads to a higher exchange rate

  2. To what extent does the government budget/statement reflect current government priorities?

    In attempts to keep these groups happy the government invests more money every year to meet their demands. Examples of these include the �800m environmental transformation fund and funding for cleaner ways to produce energy such as wind farms and nuclear power.

  1. Economics - Suppose a Government wishes to raise the incomes of the working poor.

    As the figure below shows, what we are left with is excess supply and in this case it represents unemployment. Price excess supply of labour = unemployment S E: market equilibrium D quantity In contrast, studies have shown that it isn't always the case that when there is a rise in minimum wage (or a minimum wage imposed)

  2. This report will highlight how Government policy could change to try to: Increase economic ...

    INFLATION Inflation is the "pervasive and sustained rise in the aggregate level of prices measured by an index of the cost of various goods and services". At present inflation is at 3%, this means that during the past fiscal year that there was a rise in the average level of all prices by 3%.

  1. Suppose a government wishes to raise incomes of the working poor. It suggests the ...

    wages and consequent improvement in standard of life and an increase in national unemployment. It also suggests that there are fewer jobs available at these higher wages. To back up this hypothesis, we can look at the implications of the new legislation in terms of demand and supply and their respective elasticities both in the short and long term.

  2. Governments set economic objectives - Discuss the relative importance of each of these objectives ...

    This weak growth figure seems likely to confirm fears that the UK economy is still far from economic recovery. Although the growth rate compares favourable with zero growth rates in the previous 3 months, it was lower than economists were expecting which was about 0.4%.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work