Question

5. Recently, a government official argues for an expansionary fiscal policy by increasing her government expenditures. Explain the plausible rationale by utilizing the national income identity. State а. your core assumptions. b. Explain the plausibie rationale by utilizing the production function. State your core assumptions. Using the Classical Theory, explain why this act hinters the long-term growth с. potential of this economy. Reconcile the above arguments d.

Answer 1

5 Fiscal policy followed by central authority or Government they have to increase the economic growth by increasing economic activities, they are supposed to following measures like increase or decrease the tax rate, increase or Decrease public expenditure , increase or decrease the public borrowings etc. all the fiscal measure following by central authority control the economics activities in the all the sectors of economy.

1. Fiscal policy has great impact on the national income and related aggregated apart from monetary policy. Government decides annual budget and according they try to gain the revenue and incur the cost on the various policy and projects decided in budget. In the national income expenditure method consider that various expenses incurred on account of household, government and investment increase the economy of the national. Government expenditure in economy in all three sectors shows the annual growth on aggregate basis. Government by following increasing expenditure try to enhance the industrial base and increase the production in the economy government not only consider economy activities but also social activities too. Government expenditure on construction of capital and consumer goods of national importance, industrial goods, defense & public expenditure increase the output, income and employment in the economy.
2. Production function in the economy on account of government decides the direction of economy. Government contribution to establish new enterprises and contribution in services production like banking, insurance are importance source of economy growth. Construction of transport services, port and airport contribute directly and indirectly in the economy. all production activities surrounds with economic growth taking fiscal measure into account. Government expenditure on social upliftment also contributes in the economy. production function consider the government expenditure are autonomous in nature and provide employment to economy and contribute to economic growth and welfare as the government increase the employment and output in the economy.
3. According to classical view point, economy is self‐regulating and economy is always at or near the natural level of real GDP. This view shows long term growth of economy and government or its fiscal policy try to increase the contribution in the economy and increase production, GDP and employment opportunity in the economy and people expect high wages and salary in the economy by providing their continuous contribution and economy is self regulation that set balance between demand and supply, as per J.B. say statement supply creates its own demand. But in the current scenarios both demand and supply point are interdependent on each other.
4. government contribution by fiscal measure increase national income, production and employment in the economy. fiscal policy measures try to increase the investment, production and industry base to sustain future long term growth. so role of fiscal policy is quite important.