Discuss the effectiveness of a fiscal policy in reducing unemployment
A fiscal policy is a type of government introduced macro-economic policy that aims to influence aggregate demand. The policy uses taxation and government expenditure in the form of a loose or tight fiscal policy. A loose fiscal policy would be used to tackle unemployment as this involves cutting taxation and increasing government taxation, an increase in indirect or direct taxes and increasing government expenditure. This is effective policy in the sense that a reduction in taxation, in theory would increase consumer expenditure as since taxation is low, individual discretionary income would increase and be spent on purchasing goods in the economy. There are however limitations to its effectiveness as it only potentially only deceases demand deficient unemployment but not any of the other three forms of unemployment: structural unemployment, frictional unemployment and real wage unemployment, which are mostly long term and will be better solved by the application of supply side policies. Fiscal policy would only be used as a short term solution to unemployment and is not sustainable. There are other factors external to the fiscal policy that can limit its effectiveness such as interest rates. Interest rates have substantial impact on the levels of spending by consumers. If interest rates are high a loose fiscal policy is introduced then the levels of consumer expenditure
Stimulating an economy in recession
Ranamae Zamora Economics Assignment: Stimulating an economy in recession March 27, 2007 . How might a government attempt to stimulate an economy which is in recession? Recession occurs when the economy experiences two consecutive quarters of falling Gross Domestic Product (GDP). GDP is the accounted money value of the goods and services produced in an economy. Recession shows how economic activity slows down and falls over a period in time. The decrease in GDP is shown in figure I where the real GDP trend goes below the potential real GDP. During this period there is rising unemployment, decreased output, decreased consumption and interest rates, and deflation (decrease in price level). A decrease in the components of aggregate demand (AD) such as consumption, investment and government spending as well as an increase in the components of aggregate supply (AS) such as the price of labor and price of inputs would be some of the causes of recession. So to stimulate an economy during this period the government can cause a change in the components of aggregate demand and aggregate supply. The government may use expansionary fiscal policies that influence the AD curve by decreased taxation and increased government spending. A decrease in tax would increase consumption because of an increase in disposable income and would therefore increase AD. This is shown in figure II as a
Discuss the economic consequences of unemployment
Discuss the economic consequences of unemployment As the level of Unemployment is at a new high, the consequence this is having is becoming more and more obvious. Having a huge workforce willing to work without making good use of them is a waste of resources. This has an impact on factories and manufactures because by not using the labour force they are limiting their ability to produce more goods and provide more services. This would make living standards higher; however these unemployed workers are not being put to work. By not employing workers the government has to pay a state benefit to these people, which is reducing their overall profit. By reducing the government's profit, we are preventing them from spending the profit on improving education, care, transport or health. This effectively limits our standard of living and prevents it from improving. In order for the government to actually prevent themselves from actually losing money they would have to raise taxes to afford to pay for all of the unemployed. Higher taxes rates will reduce people's disposable income and their spending power. A rise in government borrowing may push up the rate of interest, which in turn will also reduce their spending power. As the government has to pay benefits to those unemployed, principally job seeker's allowance it has to reduce spending on health services such as NHS and education.
Discuss whether deflation or inflation is a more serious problem for the economy
Discuss whether inflation or deflation is a more serious problem for an economy (12) To begin with we need to define the terms inflation and deflation. The term inflation is defined as a general and sustained rise in prices. The term deflation is opposite to this and is defined as a reduction in the general level of prices sustained over several months, usually accompanied by declining employment and output. An advantage of inflation for an economy can be it helps smaller firms grow larger. This is beneficial to the economy as it helps unemployment to reduce and increases morale for those smaller firms. Inflation will help firms and individuals who have built up debts as the rate of interest does not fully compensate for the increase in the general price level. This ultimately leads to the real level of debts falling therefore debts become more manageable. A disadvantage of inflation for an economy is a possible loss of competitiveness. For example, if the UK has a higher inflation rate than the rest of the world, its price competitiveness in international markets will fall. A rise in a country's relative inflation rates may lead to a fall in its world share of exports and a consequent rise in import penetration. This ultimately leads to a fall in the rate of economic growth and the level of employment. Another disadvantage of inflation for any economy is the
To what extent is inflation a serious economic problem.
To what extent is inflation a serious economic problem Inflation is defined as the general and sustained increase in prices of goods and services. It is caused by many factors, but in particular three factors have a major effect on the value of inflation. The first cause is too much demand within the economy. This occurs when an increase in demand cannot be countered by an increase in production in the short term due to fixed factors (e.g. land) and so producers will increase the prices to decrease demand for their products. Aggregate demand, the demand within the whole economy, suddenly rises for a product for two reasons in particular. The first is that inflation has been so low in the economy that tax revenue, for example has been falling, due to less spending and increased saving, so in order to 're-flate' prices. They provide subsidies and ask for a lowering of interest rate to boost spending and 're-flate' the economy. The second reason maybe that greater consumer confidence within the economy has lead to increased spending and thus Aggregate demand increasing. This will mean that prices for consumers have risen, due to producers 'pulling' up their prices. There could be a disadvantage to pulling the prices up. To begin with, by pulling prices up, in the future, demand will fall and we will see that profits fall for producers, as a result of less revenue. Thus
Discuss the extent to which a reduction in the rate of interest can be effective in increasing consumer expenditure and investment.
Interest rates are rates charged by the banks and financial institutions on borrowers and savers and depend hugely on the base rate set by the central bank. A cut in interest rates is mainly used in monetarist policies, and in this case a cut in interest rates will belong in a loose monetary policy. Interest rates are normally used to influence levels of aggregate demand. Lower interest rates would mean that saving becomes unattractive as the rate of return on savings is much less, it would mean that mortgage payments will also be lower as it is based on interest rates and also credit is easier to obtain. Consumers will therefore increase their spending on goods and services within the economy as their discretionary income would have increased dramatically. Increases in consumer expenditure will most likely increase aggregate demand as consumer expenditure is a component of aggregate demand. Increases in aggregate demand will promote further rounds of spending in the future as unemployment levels will be lower and economic growth will be higher hence giving consumers more confidence to spend more, therefore interest rates are effective in increasing consumer expenditure. Lower interest rates will also increase investment levels within the economy due to the same reasons mentioned above that will increase consumer expenditure. Lower interest rates would mean to businesses
Is a process of globalisation unifying the world around common interests or is it dividing the world into winners and losers?
Is a process of globalisation unifying the world around common interests or is it dividing the world into winners and losers? William Russell 400148053 Globalisation, simply put, refers to the process by which the world is said to be transformed into a single global system "such that events in one part of the world more and more have effects on peoples and societies far away." (Baylis & Smith 2001, p. 7) However, to use the phrase "simply put" when giving a definition of globalisation may be misleading as there is no simple or agreed definition of what constitutes globalisation, nor any consensus about how far the process has advanced. About all that can be said with confidence about globalisation is that it represents a major site of contestation. The contestation that this essay will focus on is neither whether globalisation in fact exists nor whether it is a new phenomenon. Rather, the focus of this essay is on the impact that globalisation has had on the world. Is globalisation a savior that is uniting the globe? Or is it curse that is dividing us all into winners and losers? The first part of this essay will focus on the question of unity. That is, is globalisation unifying the world around common interests? This question involves looking at the increase in technology and thus the increase in global mass media and communications alike. While the biggest
Discuss the effectiveness of fiscal policy measures in reducing aggregate demand?
Discuss the effectiveness of fiscal policy measures in reducing aggregate demand. Fiscal policy is the use of taxation and government spending to influence the economy. In most cases, fiscal policy is used to manage the total spending on goods and services produced in the economy. Total spending is also known as aggregate demand, which contains consumption, a major part, investment, government spending, and export - import. Theoretically, any increase in all sorts of taxes could lower the total demand, which could also be achieved through a reduction in the government spending. But AD does not work solely in the economy, its interaction with AS could bring different changes in the economy as in different situations. That is because the resources in the whole economy are constant in the short run, which would only produce certain amount goods and services at a certain period of time. At the very beginning, resources are not being fully used, spare capacity enable an expansion in the production. This process would generate more income without raising too much inflation. In the second stage, part of resources are used up, any increase in demand won't bring any increase in the level of output, but on the other hand, inflation could occur because any increase in prices would discourage potential buyers which cut off the excess demand. Next, almost all the resources are being
Discuss the extent to which the use of trade barriers by developing economies is an appropriate policy for such economies.
Discuss the extent to which the use of trade barriers by developing economies is an appropriate policy for such economies. Protectionist measures are those such as tariffs, quotas, subsidies and regulation. Tariffs are taxes on imported goods which create revenue for the government and protect domestic industries from the high pressure of the world trade market. Quotas are limits on the amount of imports allowed in a country. Subsidies are given to the producers in order to reduce costs and encourage production in that sector. A developing economy may decide to enforce tariffs on its importers. The government may d o this to discourage imported goods from being bought and encourage the demand for domestic goods. This would lead to domestic business's increasing output and therefore there would be an increase in employment and the economy would see a growth in its GDP. The tax on imports would generate more revenue and allow the governments to spend in the economy, especially on education, health and infrastructure which is what many developing economies struggle with. This would therefore lead to an increase in aggregate demand. With the price of imported goods being higher than domestically produced ones, in the long run foreign suppliers are likely to decrease supply to those nations with tariffs, due to the lack of demand. Again this would stimulate growth in domestic
Economic and Social consequences of Unemployment
Economic and Social consequences of Unemployment Unemployment has both social and economic costs. According to ILO (International Labor organization), unemployment is defined as, '' people of working age who are without work, available for work and actively seeking employment.'' In other words, it is a state of an individual looking for a job but not having one. Unemployment is one of the factors crucial in determining the economic stability of a country. There are several factors which might lead to unemployment such as labor market conflicts (trade-unions) and downturns in economy. Seasonal unemployment occurs when a person is unemployed or their profession is not in demand during a certain season. On the other hand, cyclical unemployment is when there is less demand for goods and services in the marker so the supply needs to be reduced. There is myriad number of social and economic problems related with unemployment. The reason why government stresses much on reducing the unemployment levels is because it poses a great cost on an economy. In case of unemployed people themselves, they will receive less or no income based on whether or not they receive unemployment benefits from the government. Reduction in income means less spending and therefore lower standard of living. The cost of unemployment worsens the longer a person is unemployed because it affects as he becomes
