• 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...


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.


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.


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 ...

    The raising of interest rates will result in an inflow of money on transactions in external assets and liabilities. Foreign investors will switch money from a foreign currency to the pound for two reasons. Firstly, they will be attracted by the higher interest rates available in comparison with other international interest rates.

  1. Comparing the effects of immigration on GDP in Malaysia, Japan and South Africa.

    Furthermore, they will be an increase in the population which means there will be excessive use of resources of the country that will lead to imbalance in natural resources. 8.1.1 Disadvantages on Social of Japan The concern about foreigners and crimes are highly distorted and exaggerated in Japan.

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

    In this question, the good involved is unskilled labour and the price is the minimum level of wages the company must pay. It is clear that if the price floor is imposed above the equilibrium position, demand will fall as price will be higher, and suppliers will be willing to

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

    The government wishes to reduce this level of inflation by 0.5% to 2.5%. REDUCTION OF INFLATION The control of inflation should be an integral and dominant objective of government economic policy. Effective policies to control inflation need to focus on the underlying causes of inflation in the economy.

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

    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

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

    The increase costs will lead to inflation and entrepreneurs will cut back on labour and therefore trying to control the money supply and not borrowing can be inflationary. Trying to reduce or control the money supply does keep inflation low but unemployment increases and a recession can occur and therefore government spending is not the enemy of employment.

  2. 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)

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