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

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

Extracts from this document...


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.


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.


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.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Economy & Economics 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 GCSE Economy & Economics essays

  1. How does the Government use fiscal policy to influence the economy? Discuss the view ...

    demand for goods and services. If and when the economy enters a recession, the growth of imports will fall, and this should provide an element of correction for the trade deficit. Higher interest rates act to slow the growth of consumer demand and therefore lead to cutbacks in the demand for imports.

  2. Discuss the policy options the Australian Government can use to achieve external stability

    The reduction in the cash rate means that it becomes cheaper for financial institutions to obtain funds in the short term money market, reducing the overall cost of borrowing, leading to a expansionary effect in the economy due to increased consumer and investment spending, stimulating economic activity as well as

  1. Causes of the Great Depression

    The nation's total realized income rose from $74.3 billion in 1923 to $89 billion in 1929. However, the rewards of the "Coolidge Prosperity" of the 1920's were not shared evenly among all Americans. According to a study done by the Brookings Institute, in 1929 the top 0.1% of Americans had a combined income equal to the bottom 42%.

  2. Citigroup has successfully faced the challenges of the 19th and 20th centuries and has ...

    The population in the developed world will live longer and the fertility rate will diminish. That means world's productive young population will be more concentrated in the developing world. That also means social problems in the developed countries due to public spending on retirement benefits and health care of the elderly.

  1. Monetary Policy and Fiscal Policy are two important tools of macroeconomic policy, which can ...

    It aims to maintain price stability, full employment and economic growth. The Monetary Policy can adjust the supply of money and the rates of interest in the economy. It deals with both the lending and borrowing rates of interest for commercial banks.

  2. Retailing In India - A Government Policy Perspective

    Introduction "Retailing in India could be as large as $450-500 billion and organized formats could account for a 20-25 per cent share of this." CII-McKinsey Report "Retailing in India" F or the third year in a row, a retailing company has been declared as America's largest publicly traded company.

  1. Chinese economy sets for soft landing in 2005.

    President of the United States, hailed China's economic and social progress over the past 25 years, noting that adult illiteracy has been halved, while China's rapid growth has been the single biggest factor in reducing global poverty. To sustain growth over the long term, she reckoned, China should shift to

  2. Supply side policy.

    Once again the AS curve was supposed to shift to the right, so expanding the economy by removing bottlenecks and gaps within its capacity to react to changes in national income. Exchange rate determination This was used to keep the pound at a competitive rate, so forcing domestic industry to keep their costs under control.

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