Demand Management and Fiscal Policy Essay examples -- Fiscal Policy In

Demand Management and Fiscal PolicyFiscal form _or_ system of organization is the manipulation of summation beseech using taxationand or political sympathies spending. The government tends to make most of itsfiscal decisions in the annual budget, ordinarily announced in March ofeach year.However, there are a number of problems in using fiscal form _or_ system of government tocontrol aggregate demand - one of the most significant is the problemof condemnation-lags.1. Time Lags legion(predicate) aspects of fiscal policy have a jibeed effect on aggregatedemand. Changing the fiscal stance can take nigh cadence to achieve. Forexample switching to an expansionary fiscal policy through change magnitudegovernment spending can take round magazine out front the total multiplied do are felt on the frugality. If the government announced increasedhealth service spending, there could be vast delays, asvarious committees decide how best to allocate the new funding. Then,if both(pr enominal) extra construction work is planned, contracts subscribe to negotiatingand awarding, all onward actual spending takes place. On top of allthese delays, major capital projects untold(prenominal) as new hospital extensionscould themselves take just about time to complete. The winnings effect is thatthere may be months if not years before the planned increased ingovernment spending actually has its full effect on the economy.This scenario is equally appropriate if the government is intending tobuild more roads, employ more teachers, invest more in the militaryand so forth Admittedly, a tax change is probably quicker to introduce,although often businesses need whatever advanced warning so they canaccommodate whatsoever change - again building-in some delay.Question So what is his the problem of this for demand management ?The danger is that if the government was attempting to reflate theeconomy ( ie ascent AD ) because of a lack of demand and economicactivity, by the time the expansionary fiscal policy takes effect -the economy could have entered an upswing. Thus the economy might endup being stimulated at only the most inappropriate time. This timelag in fiscal policy could lead to exaggerated swings in the tradecycle - increasing unpredictability and hence inducing more uncertainty. 2. Fine Tuning--------------Fine tune is difficult when using fiscal policy. This refers to theability to manipulate taxes and spending plans to flummox abo... ...thereany derives ?Alternatively, an participation rate decrease is likely to lead to somecapital outflows and hence a weakening of the currency.2. Interest rates and time lagsThere can be some delays before the full effects of interest rateschange are felt on the economy. When the brim of England push up ratesfor example, it will take some time for the full effects to filterthrough the economy. Some estimates put this delay as being as long as18 months.This is because, some banks e g HSBC, NatWest may not immediatelyadjust their rates straight away. all the same if they do, some individualsmay have fixed rate loans or mortgages, or they have some period offixed rate ( eg for the first 3 years of a mortgage). Therefore, theseindividuals will not have their discretionary income changed for sometime. Individuals with outstanding amounts on credit cards may alsobenefit from a couple of months delay before they start to notice thattheir interest payments have started to rise.Nevertheless, interest rate changes are thought to be much fasteracting that fiscal policy changes, as at to the lowest degree an interest change willhave some immediate conflict straight away.