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The fiscal policy should be used because it leads to increase in disposable income that translates to increase in demand for goods. It also leads to creation of employment translating to increase in consumption rate. Increase in demand eventually leads to enhanced economic growth (Sullivan & Sheffrin, 2003).
Expansionary Fiscal Policy entails the government efforts to raise the aggregate demand. It thus involves raising the government expenditure and lowering taxes. This will have the effect of increasing the Aggregate demand and eventually lead to increased rate of economic growth. This can be illustrated by the equation and the graph shown below: (AD=C+I+G+X-M).
This policy will also lead to the multiplier effect. When the government spends more, this money is transferred to the people. This means that when a person receives some money, he will spend part of it and maybe save the rest. The money will be transferred to another person who also does the same. Lowered taxes will increase the levels of disposable income which translate to extra spending and eventually higher economic growth. The multiplier effect has significant advantages to the growth of the economy because it leads to creation of employment and increased consumption (Gavel, 2012).
When the government increases its expenditure, it implies that there is more activity both in the private and public sector leading to creation of jobs. For instance, if the government decides to spend more on the construction of roads, it means that more employees will be required in offering skilled, semi-skilled and unskilled labor (Gavel, 2012). It also implies that the new projects will require materials from different suppliers who have to raise their production levels. The raised production levels will need extra labor and more people will get jobs.
As mention above, the multiplier effect leads to money reaching more people within the economy. These
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(“Macroeconomics Research Paper Example | Topics and Well Written Essays - 1000 words - 1”, n.d.)
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(Macroeconomics Research Paper Example | Topics and Well Written Essays - 1000 Words - 1)
“Macroeconomics Research Paper Example | Topics and Well Written Essays - 1000 Words - 1”, n.d. https://studentshare.org/macro-microeconomics/1644539-macroeconomics.
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