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The UK economy has been going through a recession and the goverment has employed expansionary fiscal and monetary policies to address this problem. Use economic theory to explain how these policies work and evaluate their effectiveness - Essay Example

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A recession, defined as two consecutive quarters of negative Gross Domestic Product (GDP) growth in a year, can be partially or wholly reversed by using…
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The UK economy has been going through a recession and the goverment has employed expansionary fiscal and monetary policies to address this problem. Use economic theory to explain how these policies work and evaluate their effectiveness
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The UK economy has been going through a recession and the goverment has employed expansionary fiscal and monetary policies to address this problem. Use economic theory to explain how these policies work and evaluate their effectiveness

Download file to see previous pages... Fiscal policy comes into operation through this annual budget of revenue and expenditure. Fiscal policy involves budgetary measures in which the government carries through a deficit budget in order to stimulate the economy by charging lower corporate taxes. In other words fiscal revenue in the given fiscal year will be less than government expenditure on projects. These projects are naturalluy intended to stimulate spending and subsequent economic growth (Ertl, 2008). When the government spends more than what it collects by way of taxes, especially business taxes, more money would be left in the hands of the people and businesses to spend or/and save. When such money comes into circulation the economy gets a boost.
Fiscal stimulus programs are intended to solve the problem of persistent unemployment and underemployment in the economy through government spending. However they don’t always produce the desired outcomes. For instance representative agent models in varying degrees point out to the fact that the outcomes of such fiscal stimulus programs might be negated without the slightest warning because some or all the variables in the model go awry due to some reasons which were not foreseen at the time of planning. The government might adopt a deficit budget approach and expect the economy to respond accordingly (Garrett, Graddy, & Jackson, 2008). However as many such fiscal policy alternatives suggest there can be unforeseen forces that would interfere with the macroeconomic variables and produce unexpected negative results.
Harrod-Domar Model, for example, assumes that there is a surplus of labor so that general unemployment acts as a stimulus for the unemployed to accept jobs at the going wage rate. Secondly it assumes that all production is proportional to the capital stock. Given these two assumptions the econmy would be able to absorb the extra spending of the government and the private enterprise to fuel a new cycle of growth. ...Download file to see next pagesRead More
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