Page - 2

Fiscal Stimulus: Does it Really Work and How?

Fiscal stimulus involves a combination of lower tax cuts and higher spending. In theory the tax cuts will increase disposable income and therefore encourage consumer spending, leading to higher aggregate demand and economic growth.

Diagram of Increased AD

For example, If the UK government cuts VAT by 2.5%. This means that people will pay £12.4 billion less VAT. That is a pretty substantial tax cuts. But will it increase spending considering the following facts:

Therefore, consumer spending may continue to fall. However, on the other hand if the UK government implements policies such that the tax cuts are being met with lower interest rates and a depreciating domestic currency, both of these should help increase aggregate demand.

Increased AD

So we can say that fiscal policy can help to reduce the extent of a recession. It may not solve the recession straightaway and it may take time, but, it may mean the recession is shorter lived and not as steep. Also, if the inflationary pressures are falling away, the inflation impact of expansionary fiscal policy is not so bad making it advantageous as a measure to ensure speedy recovery.

The Bailout: Stimulus Packages Across The Globe

In this paper we will understand in detail the stimulus packages of two countries i.e. USA and India.

• «Previous
• 1
• 2
• 3
• 4
• 5
• 6
• 7
• 8
• 9
• Next »

* Contributed by: -
Madhav Kumar Sharma, is a student of MBA at NMIMS, Mumbai. His specialization is in Finance. Before joining NMIMS, he had four years of work experience in the merchant navy as an Engineer Officer. His interests include finance and economics.