impact of incr expansionary fiscal policy (3)

Question 1

what are the macroeconomic impacts of increased expansionary fiscal policies in an economy of your choice

Answer 1

• actual eco. growth (SR) + reduced unemployment -> higher spending -> 21% of AD in UK -> incr AD -> real GDP up -> +ve multiplier effect (same applies to tax cuts in income + corporation) -> reduction in -ve output gap -> reduced cyclical unemployment, etc.
  potential eco. growth (LR) -> i.e investment in education, healthcare + infrasture -> improves human capital + productivty -> LRAS increased

Question 2

evaluate the macroeconomic impacts of increased expansionary fiscal policies in an economy of your choice

Answer 2

• higher spending -> worsens fiscal deficit (if not matched by higher tax revenues) -> higher national debt over time -> crowding out effect -> incr borrowing = higher interest rates -> higher costs of borrowing -> lower private investment + consumption -> offsets rise in AD
• tax cuts may incease income inequality -> Lorenz Curve shifts outwards
• tax cuts may lead to less revenue for the gov. (depends where operating on the Laffer Curve)

Question 3

what are the microeconomic impacts of increased expansionary fiscal policies in an economy of your choice

Answer 3

• impact on firms -> fiscal policy = incr spending + tax cuts -> higher AD for goods + services -> firms experience higher demand -> incr revenue -> higher supernormal profits -> more funds available for capital investment -> incr dynamic efficiency
• impact on labour market -> higher gov. spending on infrastructure, healthcare + education -> may incr employment in the public sector -> higher demand for construction, engineering + healthcare workers -> increased demand for goods + services -> increased demand for labour -> firms demand higher wages

Question 4

evaluate the microeconomic impacts of increased expansionary fiscal policies in an economy of your choice

Answer 4

• if firms speculate the fiscal stimulus to be temporary -> may avoid hiring permanent workers
• if the fiscal policy is financed by borrowing -> businesses may face higher taxation in the future -> long-term investment discouraged
• depends on type of labour market -> e.g. monospony labour market (e.g. NHS) -> may not offer higher wages due to bargaining power