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Using fiscal policy to manage the economy
M acroeconomic problem Hi gh unem pl oym ent D emand management fiscal policy (short run) D ecrease rate ofi rect taxes. Thi w ilcause ndi s l an i ncrease i consum pti assum i a hi n on, ng gh M PC and hi expectati gh ons,due to i ncreased di sposabl i e ncom e. D ecrease the rate ofdi rect taxes. Thi i lkel s s i y to cause the sam e ef ects as decreasi f ng i rect taxes but i lkel to have a greater ndi s i y i pact. m I ncrease di screti onalgovernm ent spendi ng; both current and capi . tal Supply-side fiscal policy (long run) I ncrease di screti onalcapi governm ent tal expendi ture,f exam pl oftrai ng f the or e ni or unem pl oyed. Thi w ili s l ncrease occupati onal m obii and so l er the naturalrate of lty ow unem pl oym ent i the econom y. n Reduce w elare paym ents to reduce f di ncenti to w ork and so i si ves ncrease parti pati i the w ork f ci on n orce,thus i ncreasi ng aggregate suppl y. Problems Low grow th Generaly SR fscalpolcy has a very lm i l i i i ted ef ect on LR grow th. f D ecrease rate ofi rect taxes. Thi w ilcause ndi s l an i ncrease i consum pti assum i a hi n on, ng gh M PC and hi expectati gh ons,due to i ncreased di sposabl i e ncom e. D ecrease the rate ofdi rect taxes. Thi i lkel s s i y to cause the sam e ef ects as decreasi f ng i rect taxes but i lkel to have a greater ndi s i y i pact. m I ncrease governm ent spendi on subsi si ng di ng i nvestm ent by frm s. I the short run thi w il i n s l i ncrease A D ,and i the l n ong run thi w il s l i ncrease A S. I ncrease i rect and di ndi rect rates oftaxes to decrease di sposabl i e ncom e and so decrease consum pti w i n the econom y. on thi D ecrease di screti onalgovernm ent spendi ng. I ncrease i rect and di ndi rect rates oftaxes to decrease di sposabl i e ncom e. Thi w il s l decrease spendi on l ng uxury goods,w hi ch are i ports. D i m rect taxes are descri bed as a unti bl nstrum ent as they have a l arge ef ect f but af ect the enti econom y,not j the f re ust target. I ncrease tarif ( on i ported goods)to f s tax m m ake i ports l attracti so U K consum ers m ess ve, by U K produced goods and servi Thi i ces. s s caled an expendi l ture sw i ng polcy. tchi i I ncrease di screti onalcapi governm ent tal expendi ture,f exam pl oftrai ng f the or e ni or unem pl oyed. Thi w ili s l ncrease occupati onal m obii and so l er the naturalrate of lty ow unem pl oym ent i the econom y. n Low eri the l er rates ofdi ng ow rect tax as i the n LR thi shoul i s d ncrease parti pati by ci on decreasi di ncenti to w ork. Low eri the ng si ves ng hi gher rates oftax shoul to a lm i degree d, i ted encourage entrepreneurshi w i n the p thi econom y. I ncrease governm ent spendi on trai ng and ng ni educati to: on o I ncrease parti pati ci on o I ncrease m obii lty o I ncrease producti ty vi I pl ent l m em ong run econom i grow th polci c i es to shit the aggregate suppl curve outw ards. f y I ncrease i ncenti f i ves or nvestm ent and governm ent expendi ture. M ake exports m ore com peti ve by: ti o Subsi si pri di ng vate i nvestm ent i research n and devel opm ent o Governm ent spendi on research and ng devel opm ent,educati and on i rastructure. nf I l on i caused as resources becom e scarcer as nfati s em pl oym ent i ncreases that i as the LRA S curve becom es s m ore i asti nel c. Ti e l and the m ul pler m ay w orsen the ef ects of m ags ti i f i l on. nfati The econom y m ay be near the rate ofnatural unem pl oym ent and so proporti onaly hi i l on w ilbe l gh nfati l suf ered f an i f or ncrease i em pl n oym ent. A rguabl governm ent capi expendi y tal ture i alocated l s l ess ef i entl than pri fci y vate capi expendi tal ture,as governm ents m ay have goal other than ef i ency. s fci Confi ofdecreased taxes and hi lct gher governm ent spendi ng. I l on as resources becom e scarcer and as em pl nfati oym ent i ncreases. The ef i ency ofcapi spendi by the governm ent i fci tal ng s debateabl M any argue that governm ent spendi e. ng crow ds outm ore ef i ent pri fci vate i nvestm ent as the governm ent has goal other than ef i ency. s fci Confi ofdecreased taxes and hi lct gher governm ent spendi ng.

H i i l on gh nfati

Bal ance of paym ents defci i t

Low er aggregate dem and i the short run causes hi n gher unem pl oym ent i the short run. n Hi gher corporati tax i lkel to cause a decrease i on s i y n i nvestm ent so m ay cause a l ong run probl . em Tarif not ef ecti i dem and f i ports i pri i asti fs f ve f or m s ce nel c ( hi i true ofthe U K) O f there i no U K substi w ch s . ten s tute f or a good or servi and som eti es there i no EU substi ce m s tute. Tarif m ake f polti difcul es and are il fs or i cal f i ti legalw i n thi the EU and EPTA .