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FISCAL POLICY Other Terms on Fiscal Polic PART 7 BY AYUSSH SANGHI
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Fiscal or Economic Stimulus Fiscal or Economic Stimulus refers to attempts by government to financially stimulate an economy. An economic stimulus is the use of monetary or fiscal policy changes to kick start a lagging or struggling economy. ents can use tactics such as lowering interest rates, increasing government spending and quantitative easing, to name a few, to accomplish this.
Fiscal or Economic Stimulus The term economic stimulus became a common economic term following the recession created by the 2008-2009 Credit Crisis, which caused most of the world's nations to slowdown, with many entering recessions and some depressions. Governments in many cases took unprecedented measures to stimulate lame economies through numerous economic measures.
Effects of Fiscal Policy on Macro Economy x Fiscal policy affects aggregate demand, the distribution of wealth, and the economy's capctorouc oods and services-. and the economy's capacity to produce goods and services. In the short run, changes in spending or taxation can alter both the magnitude and the pattern of demand for goods and services. With time, this aggregate demand affects the allocation of resources and the productive capacity of an economy through its influence on the returns to factors of production, the development of human capital, the allocation of capital spending, and investment in technological innovations.
Effects of Fiscal Policy on Macro Economy Tax rates, through their effects on the net returns to labour, saving, and investment, also influence both the magnitude and the allocation of productive capacity. Fiscal policy also feeds into economic trends and influences monetary policy. nfluences monetary policy
Effects of Fiscal Policy on Consumer Spending Lower taxes, everything else being constant, increase households' disposable income, allowing consumers to increase their spending. * The consequens ofthe utdepends on how much is spent The consequences of the cut depends on how much is spent or saved, and the response of economic depends on the way households make their decisions and on prevailing macroeconomic conditions.
Effects of Fiscal Policy on Consumer Spending Whether the tax cut is perceived to be temporary or permanent will influence how much consumers save. A temporary cut will alter households' disposable income relatively little, and so might have little effect on consumption. If the cut is, instead, perceived to be permanent, then households will perceive a larger increase in their disposable income and so will likely increase their desired consumption by much more than they would if they thought the cut were temporary.
Effects of Fiscal Policy on Consumer Spending There is a potential conflict between the use of fiscal policy to stimulate aggregate demand when the economy is operating below potential in the short run and the use of policy to promote longer-run goals for national saving and capital formation to improve future living standards. When there are under-utilised economic resources, fiscal stimulus can increase investment. But when the economy is operating near potential, an increase in the public debt might eventually depress private investment, unless the fiscal stimulus is reversed as the economy approaches full employment and utilisation.
Drawbacks and Limitations of Fiscal Policy Time lags are significant Recognition lag: time it takes government to recognize there is a problem Decision lag: time required for government to determine most appropriate policy Implementation lag: time it takes to figure out how to implement new directives Impact lag: time it takes to be felt through multiplier effect