Would you support expansive fiscal policies today Defend you

Would you support expansive fiscal policies today? Defend your answer with apa citation

Solution

Fiscal policy is a policy by which a government regulate an economy in short and medium term. It is a tool with which the government stabilizes the economy when business cycle fluctuates excessively (like high inflation and possible deflation). During recession, when effective demand is below potential level of output, the government adopts expansionary fiscal policy (increase expenditure lower tax), and during inflation when effective demand is above potential government adopts contractionary policy (decrease expenditure and increase tax).

During financial crises of 2008, there has been negative spillover effect of excessive mortgage and leverage activities in financial sector. As a result, due to linkage in various sectors, the credit started to freeze. Banks and firms reeling under high toxic assets (non-performing assets) reduce their investment activities. Hence, due to falling investment, income started to fall. Overall, the effective aggregate demand falls short of full employment level. The gap was so severe that many economists compared the recession with the recession of 1929.

Since, major economy of the world, including US is still struggling with sluggish growth; the expansionary fiscal policy with productivity target is very much warranted. Monetary policy has been so designed that it would complement the fiscal policy. The near-zero rate of interest have partially stimulated the business investment but not sufficient to bring the economy back to natural growth.

Hence, expansionary fiscal policy is needed when aggregate effective demand fall short of potential level of output.