The Effectiveness of Fiscal Policy Actions of the Government

Question: Discuss about the Effectiveness of Fiscal Policy Actions of the Government. Answer: The graph above represents the changes that would occur if tax was imposed on sweets and sugary snacks. Since the demand is inelastic to both low and high calorie food stuffs, the demand curve is steeply sloped; the close the elasticity to zero, the more vertical the slope becomes; at zero the curve is perfect inelastic and is vertical. The initial price is P and quantity level is Q. Since the demand is inelastic, the tax incidence will be borne by the consumers; the producers will be able to transfer nearly or the whole burden to the consumers. The price level will rise significantly. It however would require a huge tax imposition to bring some desired changes in the market behavior. I would therefore argue for the tax/subsidy imposition. Although the change wont be significant, at least there will be a reduction in the obesity level which is rising every year in Australia. The subsidy will raise the welfare of the citizens who are health conscious since they will be paying less tha t what they were paying earlier. The loss of consumers surplus for the sweets and sugary snacks consumers will be a gain to the fruits and vegetables consumers. Makin in his argument laid out the simple idea presented by Keynes on the effectiveness of the fiscal stimulus on boosting the economic activity. His simple idea was that pumping of extra spending by the government would stimulate the growth of output. This is because there will be an expansion in the economys income which will stimulate some extra spending by the households. The increased spending which means an increase in the economys level of demand causes the market price to rise. Suppliers are attracted to selling at a higher price and thus are forced to raise their production level and subsequently output expands. During a recession, the economic growth becomes poor, the investment level falls, employment falls; many people become unemployed. There is contraction of the economys income. If the governments spending remain unchanged during a recession, there will still be a deficit because the revenue raised will fall. This is because increased employment raises the governments revenue, and a decrease makes it to fall. Fiscal policies that may be implemented during a recession includes a tax cut which further lowers the governments revenue and pumping of additional government spending through borrowing. The discretionary policies increases the level of the government budget balance. A fiscal contraction would involve a reduction in the governments spending. However, this should be on wasteful government programs. The government need to do a research and determine the programs that yield good returns and differentiate them from those that dont and withdraw its spending from those that dont. It should also determine the programs that are mostly demanded by the public and withdrawal spending from those with less demand. This will reduce its spending and lower is budget deficit. Since a claim has been posed that high government spending suppresses private investment through increased interest rate. Low spending will stimulate economic growth through falling interest rate. Monetary policy can be used to create an economic stimulus by raising the supply of money in the economy or lowering of the interest rate. With a high supply of money, households have an income to raise their spending and stimulate demand and output production. At a lower interest rate, investment level rises since capital borrowing is made cheaper. Makin argue that, it is more effective because it does not increase the economys level of borrowing. It therefore helps in maintaining the credit worthiness of an economy which would otherwise be lost with the implementation of discretionary fiscal actions of additional pumping.