The fiscal multiplier looks at how much an initial change in injections affects real GDP. For example, if increased government spending of £1bn causes overall GDP to rise by £1.5bn, the multiplier effect is 1.5 If £1bn worth of tax rises causes real GDP to fall by £0.5bn, the multiplier effect is (0.5) Since 2009, …
Recently, there has been much debate about the direction of monetary policy. Should we make monetary policy ‘looser’ – expansionary monetary policy through quantitative easing / lower interest rates in order to boost growth and reduce unemployment. Or should we consider ‘tightening’ monetary policy – higher interest rates, no quantitative easing in order to reduce …
Balanced Budget Fiscal Expansion is an attempt to increase aggregate demand through changing spending and taxation levels, whilst leaving the overall fiscal budget situation the same. Essentially, the idea is that if you increase spending and taxes equally, the increased government spending has a bigger positive impact on economic growth than the negative impact of …
Readers Question Can a fiscal stimulus package reduce the extent of the recession? Fiscal stimulus involves a combination of lower tax cuts and higher spending. In theory the tax cuts will increase disposable income and therefore encourage consumer spending, leading to higher aggregate demand and economic growth. Fiscal stimulus is typically financed by higher government …
In 1980, Mrs Thatcher made a memorable speech. “To those waiting with bated breath for that favourite media catchphrase, the U-turn, I have only one thing to say: You turn if you want to. The lady’s not for turning!”(BBC Link) Background – The economy was struggling under the deflationary fiscal and monetary policy. Mrs Thatcher …
There is speculation about how long interest rates will stay at zero. – See: – How long will interest rates stay at zero? Another issue is the limitations of zero interest rates. There is much hope / expectations that fiscal austerity can be offset by loose monetary policy – i.e. if we cut government spending …
One of the great challenges of Monetary and Fiscal Policy is knowing exactly where the economy is. If output is falling, then this justifies an easing of monetary policy (lower interest rates, or in the UK’s current situation more quantitative easing). Recently GDP statistics showed an unexpected 0.4% fall in GDP. This was a key …
Why is monetary policy easier to conduct than fiscal policy in a highly divided national political environment? Monetary policy is usually implemented by independent monetary authorities. For example, in UK, monetary policy is implemented by the Monetary Policy Committee of the Bank of England. Therefore, they can take politically unpopular decisions such as increasing interest …