‘Discuss the ways in which the government may use Fiscal policy to help the economy grow out of a recession. Reference must be made to some policies that the current government has actually use’ Fiscal policy involves the use of government spending, taxation and borrowing to affect the level and growth of aggregate demand, output and jobs. Fiscal policy is also used to change the pattern of spending on goods and services. It is also a means by which a redistribution of income & wealth can be achieved. It is an instrument of intervention to correct for free-market failures. Changes in fiscal policy affect aggregate demand (AD) and aggregate supply (AS). In the UK, the Treasury (pictured right) is in charge of fiscal policy decisions Traditionally fiscal policy has been seen as an instrument of demand management. This means that changes in government spending, direct and indirect taxation and the budget balance can be used “counter-cyclically” to help smooth out some of the volatility of national output particularly when the economy has experienced an external shock and is in a recession. The Keynesian school argues that fiscal policy can have powerful effects on demand, output and employment when the economy is operating below full capacity national output, and where there is a need to provide a demand-stimulus. Monetarist economists believe that government spending and tax changes only have a temporary effect on aggregate demand, output and jobs and that the tools of monetary policy are a more effective instrument in controlling inflation and maintaining macroeconomic stability Government Spending
Government spending (or public spending) and in Britain, it takes up over 45% of GDP. Spending by the public sector can be broken down into three main areas: These are welfare payments made available through the social security system including the Jobseekers’ Allowance, Child Benefit, State Pension, Student Grants, Housing Benefit, Income Support and the Working...
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