Question

The Financial Advisors for Investment Limited is aware that a government’s fiscal policies will certainly impact his investment choices. Conduct an assessment of how the recent actions by the government to pursue a contractionary fiscal policy will impact their product selection and asset allocation strategy. Consideration should also be given on the product selection choices for retirement planning.

Answer 1

Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It is the sister strategy to monetary policy through which a central bank influences a nation's money supply.The two major examples of expansionary fiscal policy are tax cuts and increased government spending. Both of these policies are intended to increase aggregate demand while contributing to deficits or drawing down of budget surpluses.

: In our research, we intend to observe the influence of fiscal policy together with the interest rate and inflation rate on economic growth in the European Union member states. Therefore, our goal is to identify the impact of the main instruments of fiscal policy, using an unrestricted panel VAR model, on the evolution of GDP. In this way we can understand what is the response of the GDP of the member states of EU 27 to the evolution of public debt, government deficit, government spending, interest rate and inflation. Using impulse response functions we have seen that private consumption has a positive influence on GDP, the rise in public debt has a negative influence on the evolution of GDP, government expenditure has an alternating influence that turns from positive in the first half of the observation period into negative in the second, the interest rate has a strong negative influence while the inflation rate has a positive influence on the evolution of GDP.

By the end of this section, you will be able to:

a)Explain crowding out and its effect on physical capital investment

b) Explain the relationship between budget deficits and interest rates

c) Identify why economic growth is tied to investments in physical capital, human capital, and technology