Fiscal Policy Effectiveness Analysis

This assignment examines the effectiveness of fiscal policy actions by governments. It analyzes the impact of sugar taxes on demand and explores Keynesian ideas about fiscal stimulus during recessions. The assignment also discusses fiscal contraction strategies, comparing them to monetary policy for economic stimulation.

Running Head: Effectiveness of Fiscal Policies
The effectiveness of Fiscal Policy Actions of the Government
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Effectiveness of Fiscal Policies 2
The effectiveness of Fiscal Policy Actions of the Government
Question 1
The Effectiveness Sugar tax imposition
Price
P1
P
Demand
Q1 Q Quantity of Sweets and Sugary Snacks
The graph above represents the changes that would occur if tax was imposed on sweets
and sugary snacks. Since the demand is inelastic to both low and high calorie food stuffs, the
demand curve is steeply sloped; the close the elasticity to zero, the more vertical the slope
becomes; at zero the curve is perfect inelastic and is vertical. The initial price is P and quantity
level is Q. Since the demand is inelastic, the tax incidence will be borne by the consumers; the
producers will be able to transfer nearly or the whole burden to the consumers. The price level
will rise significantly. It however would require a huge tax imposition to bring some desired
changes in the market behavior. I would therefore argue for the tax/subsidy imposition. Although
the change won’t be significant, at least there will be a reduction in the obesity level which is
rising every year in Australia. The subsidy will raise the welfare of the citizens who are health
conscious since they will be paying less that what they were paying earlier. The loss of
consumers’ surplus for the sweets and sugary snacks consumers will be a gain to the fruits and
vegetables consumers.

Effectiveness of Fiscal Policies 3
Question 2
Question 2a
Makin in his argument laid out the simple idea presented by Keynes on the effectiveness
of the fiscal stimulus on boosting the economic activity. His simple idea was that pumping of
extra spending by the government would stimulate the growth of output. This is because there
will be an expansion in the economy’s income which will stimulate some extra spending by the
households. The increased spending which means an increase in the economy’s level of demand
causes the market price to rise. Suppliers are attracted to selling at a higher price and thus are
forced to raise their production level and subsequently output expands.
Question 2b
During a recession, the economic growth becomes poor, the investment level falls,
employment falls; many people become unemployed. There is contraction of the economy’s
income. If the government’s spending remain unchanged during a recession, there will still be a
deficit because the revenue raised will fall. This is because increased employment raises the
government’s revenue, and a decrease makes it to fall. Fiscal policies that may be implemented
during a recession includes a tax cut which further lowers the governments revenue and pumping
of additional government spending through borrowing. The discretionary policies increases the
level of the government budget balance.
Question 2c
A fiscal contraction would involve a reduction in the government’s spending. However,
this should be on wasteful government programs. The government need to do a research and
determine the programs that yield good returns and differentiate them from those that don’t and
withdraw its spending from those that don’t. It should also determine the programs that are
mostly demanded by the public and withdrawal spending from those with less demand. This will
reduce its spending and lower is budget deficit. Since a claim has been posed that high
government spending suppresses private investment through increased interest rate. Low
spending will stimulate economic growth through falling interest rate.
Question 2d
Monetary policy can be used to create an economic stimulus by raising the supply of
money in the economy or lowering of the interest rate. With a high supply of money, households
have an income to raise their spending and stimulate demand and output production. At a lower

Effectiveness of Fiscal Policies 4
interest rate, investment level rises since capital borrowing is made cheaper. Makin argue that, it
is more effective because it does not increase the economy’s level of borrowing. It therefore
helps in maintaining the credit worthiness of an economy which would otherwise be lost with the
implementation of discretionary fiscal actions of additional pumping.