Mankiw gives an elaborate and comprehensive macroeconomic policy in The Effects of Fiscal Policy (An increase in Government Purchase) and changes in saving. In this macroeconomic analysis, Mankiw explains the relationship between fiscal policies on the overall economic…
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Although this practice exposes the government to significant economic management challenges from the monetarists view, it is sometimes a preferable interventionary measure. Expansionary economic policy by the government increased expenditure also captures the issue of unemployment since it leads to increased employment. The ensuing effect is inflation which is a function of interest rate. Mankiw debates on the concept of saving as the opposite of investment and all are functions of interest rate (Mankiw 73). Fiscal policy generally leads to inflation and this significantly affects investment. The better part of the population would therefore rather save in expectation of future economic stability and increased value for their money so that they may invest. It is also worth to note that government expenditure affects interest rate and consumption in the same direction. Consumption is a function of disposable income hence by United Kingdom government increasing its expenditure, more disposable income will raise the level of consumption with little saving. A critical analysis of the case of UK indicates that informed economic policies that have propelled it from the period of industrial revolution, through the two world wars to date are basically based on a blend of fiscal and monetary
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