The Global Economy - Assignment Example

Changes in spending or taxes can be said to be revenue neutral, and could be construed to be fiscal policy or could have an effect on aggregate output level through changing incentives faced by individuals or firms face. Contrarily, fiscal policy is normally utilized to refer to the effect of overall taxation and spending levels on the aggregate economy, especially the gap between the two. Fiscal policy can be said to be tight if spending is lower than revenue or loose when revenue is lower than spending (Auerbach, 2009: p. 24). Usually, the centre of attention does not revolve around the deficit levels but on deficit changes.

It is a vital tool for the administration of the economy since it has the capability to affect total GDP. 2. What are the instruments of fiscal policy? Evaluate the effectiveness of increasing government spending and tax cuts as a means of stimulating aggregate demand (4 marks). 276 The tools of fiscal policy are government expenditure, direct and indirect taxes, deficit financing through printing of new notes and government borrowing, subsidies, and transfer payments such as scholarships, stipends, and unemployment allowances (Hansen, 2011: p. 65). Aggregate demand is referent to total spending by government, businesses, households, and foreigners on final services goods that are domestically produced.

The AD curve is descriptive of buying behavior for final services and goods in the aggregate. The relationship between rate of inflation and the amount of final services and goods that individuals are willing to purchase is in converse with other factors held constant. The AD curve shifts when there is an alteration in total spending on services and goods. An increase in total spending leads to a shift in the AD curve to the right (Hansen, 2009: p. 76). Inflation Increase AD AD1 AD Therefore, total spending changes and the AD curve shifts when consumption is changed, for example, through government spending, investment, tax cuts, or net foreign spending.

The AD curve shifts to the right when taxes are cut and government expenditure increases (McEachern, 2009: p. 23). There is an increase in household spending, increased business spending, increased purchases by foreigners, decreased imports and purchases of foreign products by the domestic market and increased money supply. If the government increases spending and keeps taxes as they were, aggregate demand increases directly. In addition, if governments cut taxes, disposable income increases and more is spent on consumption.

This rise in consumption leads to raised aggregate demand. However, the ability for this fiscal policy to use aggregate demand to influence output levels wears off with time. Increased aggregate demand because of this fiscal policy shows up, eventually, in higher prices without increasing output. In the long term, the output level is determined by factors of supply, rather than demand (McEachern, 2009: p. 23). 3. Explain, using the statistics of government expenditure, personal taxation rates and transfer payments, what fiscal policy stance did the 2012 Federal Budget take? (5 marks).

345 The government is also set to increase transfer statements by increasing by $1.8 billion family payments with approximately one million families set to get an increase of $300 annually and approximately 700,000 families with more