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

With reference to "Weapons of Mass Distraction", discuss whether fiscal policy is an effective tool to control economic growth.

Extracts from this document...


With reference to "Weapons of Mass Distraction", discuss whether fiscal policy is an effective tool to control economic growth. Fiscal Policy is the method a government can use to control the trade cycle. Fiscal Policy uses government spending to increase or decrease various parts of aggregate demand. These are shown as AD=C+I+G+(X-M). A major problem with fine-tuning the economy is the time lags that are involved with fiscal policy. These time lags mean that when a fiscal policy change has been put into effect, the results may come at a later period. If the economy is doing well at this period, this could well push the AD curve too close towards AS creating inflation. This means that even though it shows that fiscal policy is an effective tool, it maybe used improperly causing a problem not a solution. However, if fiscal policy is used at the right time, it will indeed be a very effective tool. And so we can infer that fiscal policy is indeed effective, yet a risk as timing also plays an important factor in its success. One of the reasons it is so effective, is due to the multiplier effect. This multiplier effect measures the effect of the cycle of respending has on the economy. ...read more.


However, if the multiplier effect is too low, then a change in AD may not be significant enough to create a difference. The extent to which these changes affect inflation, also depend on how big the output gap is to start with. Changing government spending and taxation mainly forms fiscal policy. This is because it directly affects G in the equation. However, it is generally assumed that tax cuts are less effective than government spending. This is because not all of the tax revenue received by the government. This means the mpc will be low and so reducing the effects of mpc. Also, it is difficult to measure how firms and people would react to tax cuts. Some might be ignorant of the tax cuts and carry on as normal making few adjustments. Yet some might create long-term strategies to work around the tax cut. And so how much effect the tax cut has on the economy depends on the forecast of whether the tax cut is temporary or permanent. If it's permanent, it is most likely going to have huge change, whereas a temporary one wouldn't. The extent to which the effect of the tax has would also depend on which type of tax and whether it's direct or indirect. ...read more.


The extent to which the effectiveness of fiscal policy depends on is the responsiveness of the public to these changes in fiscal policy. In an economy like Japan, fiscal policy is useless as expectations are too low for it to have an effect and increase consumer spending. Therefore expectations play an important part in how effective fiscal policy is. In conclusion, all of these factors affect the economy. However, some affect the economy more than others such as taxation is less effective than spending. Also, the effect of fiscal policy would also change depending whether the economy was in a boom or a recession. We can see this because fiscal policy would have more effect in a boom due to greater expectations and more confidence. And so overall we can see by weighing up the arguments, that fiscal policy is a powerful tool, yet it must be used in the right way. The effectiveness comes from the interaction of these two variables. If they are used to complement each other, then fiscal policy is indeed very handy. However if the opposite is true, then it can b a devastating blow to the economy in the form of deflation or inflation or loss of confidence. An important factor is also monetary policy. If monetary policy is loose, then fiscal must be very tight in order to increase the capacity of the economy substantially. Peter Tsarkov ...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

    Compare the effectiveness of the fiscal and monetary policy with some reference to supply ...

    3 star(s)

    Fiscal expansion will make us buy more imports which is bad for the economy as this will damage our balance of payments, because if makes AD rise above AS causing inflation.

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

    The difference between the actual GDP and the trend line is known as the output gap. Figure 15.0 - Production Possibility Frontier If a country has unemployed resources, it may be able to increase its output by a significant amount.

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

    First of all, there will be an increase in the number of crimes in the country which mostly done by the less educated immigrants. There will be crimes such as theft, house break-in and even murder. The country's security will be also in danger as it is having different kind of people from different countries.

  2. the limitations of Fiscal Policy

    Therefore, these points show why fiscal policy should not be used in the short run macroeconomic stabilizations but in the long run macroeconomic stabilizations. Limitations of Fiscal Policy One of the limitations of fiscal policy explained why fiscal policy should not be used for short run macroeconomic equilibrium.

  1. Budget 2004-05 and Economic Analysis of Pakistan

    (Rs.in Million) 2003-2004 2004-2005 Classification Budget Revised Budget * Tax Revenue(CBR) 510000 510000 580000 Direct Taxes 161100 161500 181900 Indirect Taxes 348900 348500 398100 Tax Revenues(Other than CBR) 67560 70108 74806 * Non-Tax Revenue 150811 180875 141517 Property & Enterprise 92432 101361 95326 Receipts from Civil & Others Function 33145

  2. Unemployment: Where is it Going?

    Nader El-Fergany, head of Almishkat Research Center, has concluded that little over 700,000 new job opportunities were created in the recent five years, but this number is needed to be created annually to absorb all new entrants (Farag 1). The World Bank estimates suggest that half a million new jobs

  1. Fiscal policy is a macroeconomic policy.

    From the multiplier, we can work out such an increase in spend is requiring by the government: k = 1/ (1-MPC) = 1/0.25 = 4 ?Y= k x ?G we need Y rise by 4000 (i.e. ?Y= 4000) 4000 = 4 x ?G ?G = 1000 Therefore, increasing aggregate demand by 1000 (G)

  2. Using Fiscal Policy to Improve Employment.

    So, unemployment causes loss of profits. The answer then is - we all pay. Similar attempts have been made to reform the unemployment assistance programs in the past. To limit unemployment, over the past 50 years the federal government has supported the private sector's efforts to create jobs and provided grants to states and other local authorities for work training programs.

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