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

Demand Management and Fiscal PolicyFiscal policy is the utilization of merge regard using taxationand or brass outgo. The presidency tends to make to the highest degree of its monetary decisions in the annual budget, usually inform in March ofeach year.However, there are a bite of problems in using pecuniary policy tocontrol aggregate demand - one of the most significant is the problemof date-lags.1. Time LagsM each aspects of fiscal policy cook a delayed result on aggregatedemand. Changing the fiscal stance can take both(prenominal) time to achieve. Forexample switching to an expansionary fiscal policy through increasedgovernment spending can take few time before the encompassing multiplied meats are felt on the economy. If the government announced increasedhealth service spending, there could be considerable delays, asvarious committees decide how best to allocate the new funding. Then,if some unneeded construction work is aforethought(ip), contracts need negotiat ingand awarding, all before actual spending takes place. On top of allthese delays, major cracking projects such as new hospital extensionscould themselves take some time to complete. The net effect is thatthere whitethorn be months if not long time before the planned increased ingovernment spending actually has its ripe effect on the economy.This scenario is equally appropriate if the government is intending tobuild more roads, operate more teachers, invest more in the militaryetc. Admittedly, a tax permute is probably quicker to introduce,although often businesses need some advanced warning so they canaccommodate any change - again building-in some delay.Question So what is his the problem of this for demand focusing ?The danger is that if the government was attempting to reflate theeconomy ( ie boost AD ) because of a lack of demand and economicactivity, by the time the expansionary fiscal policy takes effect -the economy could establish entered an upswing. Thus the economy king endup being stimulated at exactly the most inappropriate time. This timelag in fiscal policy could bear to exaggerated swings in the tradecycle - increasing volatility and therefrom inducing more uncertainty. 2. Fine Tuning--------------Fine tuning is tricky when using fiscal policy. This refers to theability to manipulate taxes and spending plans to bring abo... ...thereany benefits ?Alternatively, an bet rate decrease is likely to lead to somecapital outflows and hence a weakening of the currency.2. Interest rates and time lagsthither can be some delays before the full effects of rice beer rateschange are felt on the economy. When the Bank of England struggle 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 eg HSBC, NatWest may not immediatelyadjust their rates unbent away. Even if they do, some individualsmay have fixe d 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 enceinte 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 fast-pacedacting that fiscal policy changes, as at least an interest change willhave some immediate impact straight away.