Question

write a note summarizing the evidence for and against expansionary fiscal policy causing higher GDP growth rate. Be elaborate

Answer 1

When setting fiscal policy, the government has two levers: it can change tax levels, and/or it can adjust its spending level.
There are three forms of fiscal policy: Neutral, Expansionary, and Contractionary. The State spends more money on expansionary fiscal policy than it raises by taxes. In recessions, this form of strategy is used to build a foundation for strong economic growth and to nudge the economy towards full employment. The government collects more revenue by means of taxation than it invests in contractionary fiscal policies. The strategy works well in economic boom times

The use of expansionary fiscal policy during a recession is to kick-start the economy. It raises aggregate demand, which in turn increases economic output and employment. The government raises spending, lowers taxes or does a combination of the two in implementing expansionary policies. Since government spending is one of the components of aggregate demand, an increase in government spending will shift the demand curve to the right. A tax cut would leave more disposable income and increase consumption and investment, thus moving the aggregate demand curve toward the right.

Through the fiscal multiplier, expansionary fiscal policy will impact the gross domestic product (GDP) The fiscal multiplier (which should not be confused with the monetary multiplier) is the ratio of a change in national revenue to the change in government expenditure that triggers it. When that multiplier reaches one, the multiplier effect is called the enhanced effect on national income.