What are the arguments for and against using fiscal policy to fight inflation and unemployment?
Fiscal policy is the deliberate manipulation of govt expenditures/taxation rates and levels to achieve polcy goals. 1) Expenditures on social capital such as school buildings, road widening schemes raise AD, employment and therefore incomes. The funding of the infrastructure for the 2012 Olympics in east London will have beneficial consequences for construction industry goods, skilled labour and therefore incomes…unemployment will therefore fall…but the demand pull effects on the price of scarce labour may see wages for construction workers soar….not to mention construction industry prices and the external diseconomies may be high….price inflation in particular markets may result in everyone having to pay more for getting gas fitters, plumbers, electricians etc…where the macroeconomy is underperforming at a much lower level of national income than its full employment level or ‘nairu’ then aggregate supply elasticities may be high and govt can buy its way to full emloyment Y w
