Question

In: Economics

George Bush supported one. Barack Obama proposed one too. And Republicans and Democrats in both houses...

George Bush supported one. Barack Obama proposed one too. And Republicans and Democrats in both houses of Congress ended up passing two of them. With all this backing, surely economic stimulus packages must be good for the economy, right? Discuss why there is such a great debate going on about the use of fiscal policy (using government spending and taxing powers) to solve economic problems.

Solutions

Expert Solution

Fiscal stimulus is good for economy to manage aggregate demand according to Keynesian Economists. Government's fiscal can take economy from underemployment equilibrium to full employement equilibriumb and can help in removing any deflationary gap.

The critism for using fiscal policy to solve economic problems come mainly from Classical Tradition economists. Classical economists are noninterventionist, implying that they insist that goverment's use of fiscal policy won't have any real effects on Income rather it would increase inflation.

Monetarists also have the same policy conclusions of non intervention stating that investment sector is already stable and need not be destabilized by goverment action.

If goverment expenditure is financed through printing of money, then this would create unnecessary inflationary pressure on the economy.

If goverment expenditure is financed through taxes, them as goverment expenditure increase, expectations begin to form about corresponding tax increase in future. Thus, due to Ricardian Equivalence, increased income due to goverment expenditure may not affect consumption and again won't have any significant effect on Aggregate Demand and consequently income.

Thus, there are apprehensions in Economists regarding the use of Fiscal policy to solve economic problems.


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