In: Economics
In some developing countries, you can see modern airports, huge government buildings, and new highway system around the capital city. However, those countries’ real GDP are still low. Would you provide the possible reason(s) to explain why the expansionary fiscal policy doesn’t work in those countries?
please provide step by step explanation
Solution
Expansionary fiscal policy in in underdeveloped countries or developing countries is not as successful. Primary reasons are bureaucratic corruption, low levels of per capita GDP, a large section of society being impoverished, and many others.
Expansionary fiscal policy includes increased government spending on goods and services, military services, tax cuts.
Due to low level of income and widespread tax evasion, government always find itself suffering from huge budgetary deficits.
This imposes constraint on its limit to expand its budget. Then there are bureaucratic dealer implementation lags and other policy failures due to which the multiplier effect is highly impeded.
These factors cause the real GDP to remain low in spite of government's effort in raising the standard of living.
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