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How does the Government use fiscal policy to influence the economy? Discuss the view that the Government ought to aim to balance its budget.

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Introduction

A: How does the Government use fiscal policy to influence the economy? B: Discuss the view that the Government ought to aim to balance its budget. A: The government can use fiscal policy in a number of ways to influence different aspects of the economy. By changing key policies, the government can encourage the economy to change the way it is working. If the economy is a bit sluggish and people are not spending very much so that businesses are not growing, then the government may decide to use a reflationary set of policies designed to get the economy growing. They can do this by lowering taxes or by keeping taxes at the same level and instead spending more money with businesses and producers within the economy. Alternatively, if the economy is doing particularly well and growing significantly the government may be worried that there is a risk of inflation so they may want to gently slow down how much people are spending. ...read more.

Middle

Here is a diagram which shows how the use of fiscal policy through taxation can work. B: It should aim to balance it budget for several reasons. If national debt spirals out of control, this could increase taxation to a very high level. This in turn would leed to unemployment and could put a country into a recession. A budget defeceit is ok if the circumstances are acceptable. For example, if the government is using the money to stimulate the economy and pull it out of a recession (fiscal policy) this is not a bad thing. It is difficult in some circumstances to measure the budget, and to decide whether a defeceit is a good thing. An improvement in trade performance does not necessarily mean that we are seeking to turn a trade deficit into a surplus. Performance might be measured by other criteria, for example: * rising share of world trade in exports of goods and services * A higher trend rate of growth of exports Some of the overall trade deficit is due to the strength of domestic (home) ...read more.

Conclusion

A lower exchange rate should also cause imports into the UK to become relatively more expensive this should slow down money leaving our economy. The key to controlling or reducing a balance of payments deficit in the long term is for the economy to achieve relatively low inflation while being able to meet consumer demand as it increases. To meet growing aggregate demand the government needs , low interest rates and a competitive exchange rate matched with sufficient non-price competitiveness in overseas markets. Often price isn't what persuades people to purchase goods and services. It can be due to a good advertising campaighn or investment into research and development for a product. As aggregate demand increases the economy needs to be able to keep up with aggregate supply. A rightward shift of the long run aggregate demand curve would mean the economy now has a greater capacity. This can only be achieved if a balance of payments is achieved. It would be near impossible to increase aggregate demand if there is a high national debt. ...read more.

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