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Some economists argue that fiscal policy is an ineffective form of government intervention. Discuss fiscal policy and its effectiveness in stabilizing the economy.

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Introduction

Economics- CIA 4U0 Final Summative Evaluation Part A - Essay B) Some economists argue that fiscal policy is an ineffective form of government intervention. Discuss fiscal policy and its effectiveness in stabilizing the economy. Malvinder Garcha CIA 4U0 Mrs. Wallace Due: Friday, January 20th, 2006 Effectiveness of Fiscal Policy As an economy experiences periodic swings in aggregate demand and real output throughout its business cycle, the government must intervene and dissolve the instability through means of policies; but this was not always thought to be the solution. From the years 1929-1939, the world experienced a global recession for the first time in history, known as the Great Depression (http://en.wikipedia.org/wiki/The_Great_Depression). The depression stunted every aspect of economic growth as banks failed, unemployment was high, GDP drastically dropped, and the stock market plummeted; leaving economists in disbelief. Theories of all sorts varied from economist to economist, but some, such as that of Adam Smith, were greatly emphasized. Smith believed in the laissez-faire, "leave to do", economy in which he believed that the "an economy operates best if individuals are allowed to pursue their own self-interest without government intervention" (Bolotta, 454). ...read more.

Middle

Automatic stabilizers are defined as "mechanisms built into the economy that automatically increase aggregate demand when needed." (Bolotta, 232). Automatic stabilizers include employment insurance, welfare programs, and progressive taxes. These are all systems that already exist in the government and require no intervention to implement as they are regulated by the market, making them efficient and effective. In times of a recession or boom, automatic stabilizers stimulate the increase of aggregate demand, whereas in times of high inflation, they are able to decrease aggregate demand. After digging out of the trough and entering a recession period of low employment as well as inflation, automatic stabilizers increase and help to maintain incomes of employees and increase aggregate demand. Also, automatic stabilizers are fast and easy to implement, requiring little time and effort, making them effective. In today's rapidly changing world, the need to complete tasks in the least possible time period is very important, and automatic stabilizers allow for quick action and results. With the aftermath of the Great Depression and failure of the economy, it is evident that government intervention, such as automatic stabilizers within fiscal policy, are crucial to protect the economy from recession and depression. ...read more.

Conclusion

The use of either of these discretionary fiscal policies benefits all of the employees and employers in the workforce, even though it takes a fair bit of time to take full effect. By using discretional fiscal policies as a tool of government intervention in the economy, taxation dollars and government spending effectively strengthen and expand society as a whole. Acting as a very effective stabilizer of fluctuations in the economic business cycle, fiscal policy allows the government to mediate the economy in both direct and indirect manors. Automatic stabilizers already are embedded within the economy and therefore allow for allow for indirect, but minimal government intervention, allowing for strength to avoid depression. In times of need, automatic stabilizers help maintain incomes and aggregate demand within the economy by offering insurance and support to help maintain stimulation. Direct government intervention through discretional fiscal policy provides inducement through tax cuts and or government spending to encourage investment in the economy. Fiscal policy allows for stimulation or slowing of the economy through both direct and indirect actions and is very effective in controlling fluctuations, instability, and periodic swings within an economy's aggregate demand and GDP. ...read more.

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