Does Fiscal Policy solve unemployment?

Does Fiscal Policy solve unemployment?

Readers Question: Is the fiscal policy effective/the best policy to deal with unemployment? It is an interesting question and one that is likely to generate different views from within the ranks of economists. To give a very rough overview:Keynesians say yes, fiscal policy can be effective in reducing unemployment. In a recession, expansionary fiscal policy will increase Aggregate Demand (AD), causing higher output, leading to the creation of more jobs. Classical/monetarist economists say no. Fiscal policy will only cause a temporary increase in real output. In the long run, expansionary fiscal policy…

Factors affecting Current Account Deficit

Factors affecting Current Account Deficit

The size of current account deficit/surplus is affected by several factors including:Exchange rate (overvalued exchange rate would cause large deficit) Level of consumer spending (economic growth) and hence import spending Capital flows to finance deficit in long-term Saving rates – influencing level of import spending Relative inflation/competitivenessThe current account measures:The balance of trade in goods The balance of trade in services. Net current income e.g. profit from overseas investment. Transfer payments e.g. payments to the EU.NotesA deficit…

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State Intervention and Market Failure

Readers Question: State intervention is necessary to maximize social welfare but intervention often comes at a heavy price. So why not rely on the market system to tackle the problem? It is one of the great debates of economics – How much should the government intervene in the economy. Firstly we have to consider occasions where government intervention is necessary to improve economic welfare. Types of Market FailureMerit goods (e.g. education, under-consumed because people ignore benefits of it) Demerit goods (e.g. alcohol, over-consumed because people ignore costs of it.) Public goods…

Effect of Government Subsidies

Effect of Government Subsidies

Readers Question: What happens when the government subsidizes a product?  A subsidy means the government pays part of the cost. For example, the government may give farmers a subsidy of £10 for every kilo of potatoes. The effect is to shift the supply curve to the right, leading to lower price and higher quantity demanded Diagram of SubsidyIn this case, the government is giving a subsidy of £14 (30-16). The subsidy shifts the supply curve to the right. It leads to a lower market…

How to increase Economic Growth

How to increase Economic Growth

Readers Question: from solutions to the economic crisis? I agree on ‘growth’ but we don’t understand how to achieve sustainable growth. This can only come from either continuing to increase the UK’s population or by continuing to improve efficiency. The first is clearly impossible as we would bust at the seams. This means the only choice we have is INVESTMENT – And in the RIGHT areas. Our politicians (and most economists?) do not understand this. There are two main aspects to economic growth:Aggregate demand (AD) (consumer spending, investment…

Impact of rising population in the UK

Impact of rising population in the UK

The UK population is projected to increase by 9.7 million over the next 25 years from an estimated 64.6 million in mid-2014 to 74.3 million in mid-2039. (ONS). Approx. 50% of the population increase is expected due to net migration. This is a look at the economic and social impact of a rise in the population.The UK is bucking the trend of many Western economies, such as Italy, France and Japan – who are seeing low birth rates, an ageing population…

Factors affecting supply and demand of housing

Factors affecting supply and demand of housing

A look at factors affecting the demand and supply of housing. In summary, some of the main factors include1. Affordability. Rising incomes mean that people are able to afford to spend more on housing. During periods of economic growth, demand for houses tends to rise. Also, demand for housing tends to be a luxury good. So a rise in income causes a bigger % rise in demand.This graph shows…

Would inflation and stagflation help to reduce inequality?

Would inflation and stagflation help to reduce inequality?

Readers Question: It has been suggested in a philosophy/economics class that I am taking that given the current state of income inequality between the 1% and 99%, that a period of stagflation might be an effective equalizer. I don’t see it. Any thoughts? Stagflation is a period of negative economic growth (or very low growth) combined with inflation. Under stagflation we get several problems at once – rising unemployment, rising prices, falling real wages and lower economic growth. Stagflation poses a problem for policymakers because it has hard to…