Effectiveness of Fiscal policy

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    Effectiveness of Fiscal policy

    Advantages

    • Taxes and government spending adjust automatically to offset fluctuations in real GDP
    • Has the potential to increase both AD and AS via spending and taxation

    Disadvantages

    • It can take time for the policy implemented to have an effect on the economy, and it can also take a while to grab the data necessary for evaluating which policy is best
    • Some forms of spending may be inflexible
      • g. pensions or healthcare
    • The policies need to be based on accurate information
      • g. if a recession’s predicted, the government will implement expansionary fiscal policy; however, if a boom actually happens, inflation may occur, and the business cycle will continue, hence an unstable economy.
    • Households and firms may act in unexpected ways
      • g. if consumers lack confidence, tax cuts may not lead to higher consumption; underestimating the size of the multiplier effect may also cause this.
    • Changes in other countries may also have big impacts, as if the UK is pursuing expansionary fiscal policies whilst others are experiencing a recession, AD in the UK may not rise by much.

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