Expansionary monetary policy An expansionary fiscal policy, such as the Chancellor of the Exchequer's decision to reduce the standard rate of income tax, leads to higher aggregate demand and an increase in equilibrium income and production. In this essay I will examine the factors that would be important in determining the macroeconomic effects if such a policy were adopted by Gordon Brown (Chancellor of the Exchequer), and I will comment on any suggestions I might have for Gordon Brown in preparing his next budget with a brief description of the assumptions on which my advice is based. Macroeconomic Objectives First I would like to look at the macroeconomic objectives/aims of Gordon Brown and his fiscal policy. Fiscal policy is the government's plan for spending and taxing, it is designed to steer aggregate demand in the desired direction, which we will look at in more detail later today. Macroeconomic policy is a phrase used to describe actions taken by governments to manipulate the economy to influence the level of inflation and unemployment. Along with balance of payments and high, stable economic growth, low inflation and high employment are two of the government's four main macroeconomic objectives. In practice, macroeconomic policies could be used to refer to both policies aimed at influencing aggregate supply and policies aimed at influencing aggregate demand. We will examine aggregate supply and aggregate demand in both the long and short runs and show their effects on macroeconomic policy. In this graph we can see that, following a decrease in income taxes, aggregate demand will shift to the right from dC to dC1. Long-run aggregate supply is a vertical line that maintains Y at the natural rate of Y*, which in turn produces constant output and rising prices, which is an effect of rising inflation. Here we can see that short-run aggregate supply is a horizontal line. An increase in the aggregate demand curve from AD to AD1 results in an increase in output if income taxes were reduced while keeping the price level constant at P*. In this example Gordon Brown is able to achieve at least 3 of his 4 macroeconomic objectives. Since growth is obvious as output increases from Y to Y1, the increase in growth produces jobs and therefore an increase in employment, all while the price level remains constant at P......half of sheet ...... or act quickly and make looks favorable in the eyes of the public. The economy is currently thriving, so my initial advice to Mr. Brown would be to leave a good thing alone and leave the income tax rate as it is. However, ahead of the election, Mr. Brown wants to show me that he is doing something for me and that a tax cut will be viewed favorably in the eyes of the public. Mr. Brown may consider cutting taxes and in the long run, as discussed above, the economy will keep the price level constant and increase production, he can deal with correcting the long-run consequences of an increase in the price level and a return to the natural rate of income. after he is elected. To the non-economist, a decrease in taxes will seem beneficial because of the increase in aggregate demand: production will increase, employment will increase as will the wage rate, all while the interest rate remains constant. Assuming that Mr Brown has no personal agenda and is solely interested in the well-being of the UK economy, I would suggest maintaining the current fiscal policy, to.