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Explain how the use of fiscal policy can stimulate economic growth

This is a classic higher economics question.Economic growth is an increase in the value of goods and services produced in an economy within a period of time.Fiscal policy is the use of government spending and taxation to achieve government aims.first examine final policy through an increase in spending: Increase spending would increase circular flow of income for example increasing spending on public sector wages would lead to more consumer spending. (development could look at the multiplier effect. Increasing spending in areas such as training schemes which will increase productivity.This increase in money flow will increase aggregate demand which will signal firms to respond by increasing output, therefore increasing economic growth. (development could look at an increase in output would increase demand for labour)secondly examine fiscal policy through taxation:Reduce taxation would increase circular flow of income and therefore aggregate demand. For example reducing direct taxes such as corporation tax would increase funds available for firms to invest and increase the number of people starting businesses.A reduction in the indirect tax VAT would lead to more disposable income, therefore more consumer spending.  Increased demand will signal firms to respond by increasing output.



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