Discuss the effectiveness of fiscal policy to promote economic growth
Fiscal policy is the use of government expenditure and revenue in order to influence the economy and fund public goods and services. Fiscal policy is the main instrument government uses in order to try and create economic growth. However its actual effectiveness at meeting this objective is arguably not that good for a number of reasons which will be discussed in this essay.
The main part of fiscal policy in order to increase growth is expansionary fiscal policy. This is where the government is spending more or cutting taxes in order to put more money into the economy than it is taking out. This is normally pursued when a government is trying to combat recession and increase economic growth. This should then shift aggregate demand to the right as shown in the diagram. This is because not only is increased government expenditure beneficial in the short run but also has a multiplier effect. This means that the money the government places in the economy multiplies as it spreads through the economy. This is because the spending creates more jobs which in turn create more money. This means that pursuing an expansionary policy is particularly effective at combating recession as not only does it boost economic growth but it also decreases unemployment, another important macroeconomic objective. However that is only one part of an expansionary policy as it can also be combined with reduced taxation. This is also very effective at pushing economic growth as it gives more of an incentive to work as they get to keep more of their income. Not only would this increases productivity but again it would push aggregate demand to the right as people would have more expendable income to spend in the economy. This is also effective as the government may even get more money in tax revenue if it decreases tax due to the laffer curve.
However these policies may not always be effective as people may want to save their money rather than spend it due to not feeling wealthy because of
The main part of fiscal policy in order to increase growth is expansionary fiscal policy. This is where the government is spending more or cutting taxes in order to put more money into the economy than it is taking out. This is normally pursued when a government is trying to combat recession and increase economic growth. This should then shift aggregate demand to the right as shown in the diagram. This is because not only is increased government expenditure beneficial in the short run but also has a multiplier effect. This means that the money the government places in the economy multiplies as it spreads through the economy. This is because the spending creates more jobs which in turn create more money. This means that pursuing an expansionary policy is particularly effective at combating recession as not only does it boost economic growth but it also decreases unemployment, another important macroeconomic objective. However that is only one part of an expansionary policy as it can also be combined with reduced taxation. This is also very effective at pushing economic growth as it gives more of an incentive to work as they get to keep more of their income. Not only would this increases productivity but again it would push aggregate demand to the right as people would have more expendable income to spend in the economy. This is also effective as the government may even get more money in tax revenue if it decreases tax due to the laffer curve.
However these policies may not always be effective as people may want to save their money rather than spend it due to not feeling wealthy because of