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Economic Growth (Actual Growth -Increase in actual output produced by…

- - - - Action Time Lag between recognising the problem and implementing policy. ΔG and ΔT are announced at the start of the final year. During this time, the problem could get worse.
        Effect Time Lag e.g. infrastructure takes time. Although total injection is large, it is spread out. by the time effects are experienced, the problem is not as severe, and policy is no longer appropriate.
      - G is inflexible; e.g. G↓ on education is detreimental, and long term projects e.g. road cannot be postponed. Also, G is planned in the budget, and the government is reluctant to make changes; parlimentary debates takes months
      - Impact of tax changes is uncertain, since they work through dY. In recession, families are pessimistic and save more in case of a dip in income, so C may not increase
      - If G is financed by borrowing, increase in D for money increases I (the cost of money). AS I increases, HH borrow less, as cost of borrowing increases, I↓ as less profitable to invest. Hence, crowding out i.e. diversion of funds away from private sector
      - G affects AD directly, so result is certain
      - Can target sectors of the economy e.g. G on education or healthcare
      - Can affect potential output and long term EG through investments in infrastructure, education (physical and human capital)
      - Discretionary Fiscal Policy
        using the budget to influence the level of spending by deliberately changing government spending or taxation to smooth out business fluctuations and to ensure full employment
        -G↑
        -dT↓ (CT↓, ATP↑, I↑; YT↓, dY↑, C↑)
        -AD↑
      - Automatic Stabilizers
        in-built stabilizers left to respond automatically without action by government authorities to reduce short-term fluctuations in the business cycle
        
        stimulates economy during recession by AD↑
        
        Smoothen the business cycle, reducing market volatility/uncertainty
        
        Passive and hence administratively simple
        
        Transfer Payments
        -payments made by the gov't with no exchange of G&S
        -include unemployment benefits and welfare benefits to the poor
        -during recession, TP↑, dY↑, AD↑
        
        Progressive Tax
        -average tax rate proportional to income
        -during recession, Y↓,T↓, dY↑, slows down contraction
    - - Change the Interest Rate
        by changing the supply of money (it is vertical when on the Interest/Quantity of Money graph) to change interest rate
        
        change the discount rate, or the interest rate at which commercial banks borrow from the central bank. if DR↓, commercial banks borrow more, S↑
        
        change the required reserve ratio; i.e. the amount of money in the vaults for people who withdraw. If rrr↓, can lend out more, S↑
        
        open market operations; buy bonds to S↑
      - can be quickly implemented because does not have to go through political process
      - rates can be adjusted incrementally, so economy can be fined tuned in very small steps
      - Effect Time Lags; a few months may elapse before changes occur
      - ineffective during recession because banks may be unwilling to loan for fear that the people cannot repay; firms are pessimistic on the future and may avoid borrowing