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Fiscal Policy: Government Spending (Evaluation)

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Fiscal Policy: Government Spending (Evaluation)

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- However, the multiplier effect will differ from country to country and so would not have the desired effect everywhere. For example, in LEDC's the multiplier effect would be much higher comparatively.
- Additionally, when the government chooses to increase its spending, it may only help a certain group of people. As an example, if the government chose to increase the pension, it may not have the desired effect of increasing in spending, because people may choose to save and it would therefore not stimulate AD as there was no increase in spending from the economy.
- An example of this would be in China, where the government tried to stimulate the economy by giving the young adults about $600, however they chose to save instead and therefore became a transfer instead of spending, therefore not affecting the AD of the economy.
- There will always be a time lag in which the effect of the increase in the government spending will take into effect. Also, the government may not have the best idea of what the economy needs and may spend it on the wrong thing, therefore not having the desired effect of stimulating the economy and increasing AD

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How does PES effects the extent to which price and quantity changes

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How does PES effects the extent to which price and quantity changes

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However, if the LRAS is relatively price inelastic then the same shift in Demand will cause a greater change in price and a smaller change in quantity demanded.
If LRAS is relatively price elastic the same shift will cause a smaller change in price and a bigger change in quantity demanded.
If demand is perfectly price inelastic or on the perfectly inelastic part of LRAS then the shift in AD will only effect the price. If demand in perfectly price elastic or is situated on the elastic part of LRAS the same shift in AD will only cause the change in quantity and won't effect price.

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Lower taxes should increase disposable income of consumers leading to higher levels of consumer spending. This would increase aggregate demand and lead to higher economic growth. Increasing tax would decrease profit which would make firms to produce more

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In order to shift AD, interest rates would need to be reduced. This would cause consumption to rise as people would be able to borrow more easily, making it easier to buy expensive items such as houses or cars. Imports and exports would be affected if interest rates were reduced. Lower interest rates would cause the exchange rate to fall. Government spending would not be affected by a reduction in interest rates. Investment would increase with lower interest because people would be able to borrow more money to invest. This would trigger an overall growth in the economy.

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depends on the magnitude the other components of the AD- for example, consumers confidence
if confidence is low people save rather than spend
reduces consumption and so lower demand and less production
firms need less jobs which leads to unemployment

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- G is a component of AD
- If we want to increase aggregate demand, then the government spending also needs to increase
- If government spending increases, this is an injection into the circular flow of income
- With the increase in the money in the circular flow, due to the multiplier effect, the value will be larger than what the government initially injected
- This would help stimulate the economy and so would increase the aggregate demand

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Monetary Policy is where interest rates and other monetary tools are used to influence the levels of consumer spending and AD. In the UK the target is to keep inflation around 2%. They also consider other macroeconomic objectives such as growth and low unemployment. Monetary policy is set by the Monetary Policy Committee. The MPC also uses Quantitative Easing as part of Monetary Policy

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economic growth
low unemployment
low inflation
balance of payments
full employment
rising living standards
fiscal balance

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- Monetary Policy
- Fiscal Policy