Answer to Question #34849 in Economics of Enterprise for carol

Question

if equilibrium income and full employment national income are 400 and 600 respectively. what kind of policy should government employ to achieve the full employment income level? and illustrate with use of diagram.

Answer 1

The classical economists were of the view that the economy automatically moves towards full employment in the long run. They ruled out the possibility
of over production and hence unemployment in the long period. The role of the
government in the economy, according to the classical economists, should be the
minimal.

The J. M. Keynes in his famous book, "General Theory of Employment,
Interest and Money", disagreed with the views of the classical economists
that the economy has the tendency to move towards full employment in the long
run.

He was of the strong view that the government must interfere in economic
matters to achieve full employment, to prevent inflation and to promote rapid
economic growth. In order to achieve the macro economic goals, he stressed that
the government must step in and use government expenditure and taxes for
changing the size of national income and the tempo of aggregate economic
activity in the country. The use of deliberate changes in government
expenditure and or taxes to achieve certain national economic goals is called
Fiscal Policy.

Fiscal policy thus is the deliberate change in government spending and taxes to
stimulate or slow down the economy. In the words of F.R. Glahe:

"By fiscal policy is meant the regulation of the level of government
expenditure and taxation to achieve full employment without inflation in the
economy".