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Explain the effects of fiscal policies on the economies production and employment?
Wiki User
∙ 14y ago
Written by: Rohullah Nowaid
Dated: October 30, 2009
Effects of Fiscal Policies on Employment and Production
Undoubtedly, the fiscal policies have tremendous effects on individual behavior and everyday decisions made by households as well as businesses. A change tax schedules has direct effect in cost of production and the bottom-line for corporations or net income for individuals.
Fiscal Policies and Employment
One of fiscal policy component is taxation. An increase in taxes results in reduced net income. Organizations look into profitability factors and value of labor force in comparison to return on investment for use of technology or outsourcing tasks otherwise performed internally or domestically. Conversely, individuals may perceive an increase in tax as a form of punishment, which can lead to promotion of more black market labor (cash labor). Of course, a decrease in taxes may lead to further domestic hiring and lesser black market labor.
Equally, it is important to note that changes in taxation policies, as a part of the fiscal monetary policy, can have significant effects on the intensity of employment market, and overall efficiency and productivity. The fiscal monetary policy of the government plays a crucial role on employment factors.
Fiscal Policies and Production
Interest rate is another component of the fiscal policy. Adjusting the interest rate can have adverse or favorable impact on production. To clarify, adverse in monetary policy is not negative connotation, and favorable is not a positive suggestion. In the monetary policy when market is collapsing too fast the government may want to have an adverse result to bring the market under control.
Change in interest rates alters velocity of "cash." Meaning, when interest rates hike, cash becomes scarce and credit tightens, as a result, monetary expansion becomes limited and production decreases. On the other hand, when interest rates decline, cash becomes more available and credit loosens, as a result, monetary expansion becomes more vibrant and production increases.
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