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Macroeconomic Environment of Business - Limitations of the Use of Fiscal Policies - Case Study Example

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This paper "Macroeconomic Environment of Business - Limitations of the Use of Fiscal Policies" focuses on the global financial crisis which stretched its hands on what is regarded in today’s world as “Great Recession” which had serious impacts on the economic stability and fortunes of many countries. …
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Macroeconomic Environment of Business - Limitations of the Use of Fiscal Policies
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Download file to see previous pages There was a continuous rise in the staple food prices resulting in runaway inflation close to 6%. The European central bank raised the interest rates and increase in the unemployment rate at the end of 2008 due to the outbreak of the housing bubble all contributed in resulting the recession.
The US GDP showed its slowdown in 2008 (Suffolk County Council, 2008, pp.3-4) and fell further in 2009, the first time since the 1950s. There was a decline in capital investment since the last quarter of 2006 and the pace of residential investment dropped down in the first part of 2009. The US domestic demand is a record breaker dropping down to 2.6% per quarter. Unemployment also started to rise and matched with that of the early 1980s.
Fiscal stimulus played an important role in nullifying recessionary spiral. However, the impact seems to be much less for economies with higher amounts of public debt. In order to support the aggregate demand, the need of the time is aggressive monetary policies. Economists who follow Keynes argues that an expansionary fiscal policy act as an incentive to increase aggregate demand. Even such a step may not be fruitful because steady economic growth depends on the health of the economy. Restoring the confidence of the financial sector is the key to move out from such a situation (International Monetary Fund, 2009, pp. 111-112). The need is to analyse the effects of discretionary policies on the severity of recessions. Expansionary fiscal policy acts to increase demand either directly through an increase in government expenditure or indirectly through a reduction in tax which will stimulate the private consumption to take effect.
There may be a few limitations of using fiscal policy in order to increase aggregate demand. The time factor is to be taken into account. The government needs time to change its fiscal plans and once implemented the new plan will take time to increase the aggregate demand. Again increasing aggregate demand may be the factor in causing crowding out which means that if the government tries to increase its expenditure then it may lead to falling in private sector spending.   ...Download file to see next pagesRead More
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