Other factors affecting how effective fiscal policy is include the time lag between the implementation of a new policy and the realization of effects of that policy, the effects policy changes have on interest rates and other economic concerns, and the actual quality of the policy change. YOU MIGHT ALSO LIKE... 20. This leads to a phenomenon called "crowding out," in which the borrowing necessary for increased spending and decreased taxation leads to increased interest rates that drastically decrease the policy's effectiveness. Answer:These 3 factors influece effectiveness of a country´s monetary and fiscal policy:- Reserve ratios;- open market operations:- interest rates affecting the… Explain, Question 1 (a) Account for the downward sloping nature of the demand curve. Aims: By the end of this chapter, you will be able to (i) distinguish discretionary fiscal policy from automatic stabilisers, (ii) evaluate the effectiveness of fiscal policy, and (iii) use AS-AD model to analyse the effect of a discretionary fiscal policy. Comments welcome Abstract Recent years have seen a revival of the debate about the role of fiscal policy in stimulating economic activity. The effects of fiscal policy on economic growth are driven by many factors such as the employment in the economy, the transparency of government, the composition of government expenditures, or even the government size (see Kasselaki and Tagkalakis, 2016; Hemming et al., 2002 ). The effectiveness of fiscal policy is largely dependent on the balance between taxation and spending. Monetarists often seek to keep both inflation and interests rates low and under control. Fiscal Policy . This little known plugin reveals the answer. The second factor causing ineffectiveness of monetary policy occurs in the third step of transmission mechanism, namely, changes in aggregate spending or demand in response to changes in interest rate. This shows that the effectiveness of fiscal policies is limited by the willingness of the public to perform as predicted. Amazon Doesn't Want You to Know About This Plugin. Conclusion: The relative effectiveness of monetary and fiscal policy depends upon the shape of the IS and LM curves and the economy’s initial position. Other factors affecting how effective fiscal policy is include the time lag between the implementation of a new policy and the realization of effects of that policy, the effects policy changes have on interest ratesand other economic concerns, and the actual quality of the policy change. a Keynesian stimulus for the short-term), the extent to which crowding out occurs will limit the stimulus. The role of fiscal policy is also considered, ... six factors that may prevent this … We employ the following threshold VAR model with two regimes . Eplain four factors that would limit the effectiveness of fiscal policy instruments in developing countries. (c) Define “inflation” (d) Explain the effects of inflation on the funtions of money in an economy. If the budget deficit is very for example, and if the government is doing a lot of borrowing, greater government spending may not be enough to stimulate the economy. Fiscal policy refers to the use of government spending and tax policies to influence macroeconomic conditions, including aggregate demand, employment, inflation and economic growth. Fiscal policy is a key tool of macroeconomic policy, and consists of government spending and tax policy. Adverse Effect on debt Management: The use of fiscal instruments during unemployment and depression is often associated with the subsequent problem of debt management. 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