Expansionary Fiscal Policy
Expansionary fiscal policy, such as the Chancellor of the Exchequer deciding to reduce the standard rate of income tax leads to higher aggregate demand and an increase in equilibrium income and output. In this essay I will examine the factors that are important in determining the macroeconomic effects should such a policy be installed by Gordon Brown (Chancellor of the Exchequer), and I will comment on any suggestions I may have for Gordon Brown in the preparation of his next budget with a brief description on the assumptions that my advice is based. Firstly I would like to examine the macroeconomic goals/aims of Gordon Brown and his fiscal policy. Fiscal policy is the governments plan for spending and taxation, it is designed to steer aggregate demand in some desired direction, which we will investigate in greater detail later on today. Macroeconomic policy is a phrase used to describe actions taken by governments to manipulate the economy to influence the level of inflation and unemployment. Along with balance of payments and high stable economic growth, low inflation and high employment are two of the main four macroeconomic goals of the government. In practice, macroeconomic policies could be us
We will investigate aggregate supply and aggregate demand both in the long run and in the short run and show their effects on macroeconomic policy. Ricardian Equivalence The traditional aggregate supply and aggregate demand model makes the picture of reducing income tax very clear: Lower taxes means higher aggregate demand, higher interest rates, crowding out, and less investment for the future. An example of this is where the government cuts taxes by $500 million, however to cover this loss in revenue the government issues $500 million in government bonds. This fiscal expansion moves the equilibrium along the LM curve from E to E1. An increase of the aggregate demand curve form AD to AD1 results in increased output should income taxes be decreased while keeping the price level constant at P*. The IS schedule shows the different combinations of income and interest rates at which the goods market is in equilibrium and the LM schedule displays the combinations of interest rates and income compatible with equilibrium in the money market. Gordon Brown, Chancellor of the Exchequer. Female employment is currently at its highest rate ever of 68. To the non-economist a decrease in taxes will seem beneficial due to !the increase in aggregate demand: Output will increase, employment will increase as will the wage rate, all while the interest rate stays constant. Brown would be to leave a good thing alone and leave the income tax rate as is. are favorable and don't need to be fixed. This tells us that the private sector is neither richer or poorer as a result of this tax cut, and hence will not change desired spending and has no effect on aggregate demand.
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Acceptance Essays
