Expansionary Monetary PolicyAn 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 a increase in income and equilibrium production. In this essay I will examine the factors that are important in determining the macroeconomic effects if such a policy were put in place by Gordon Brown (Chancellor of the Exchequer), and I will comment on any suggestions I may have for Gordon Brown in the preparation of its next budget with a brief description of the assumptions on which my advice is based. Macroeconomic Objectives Firstly, I would like to look at the macroeconomic objectives/objectives of Gordon Brown and his fiscal policy. Fiscal policy is the government's spending and tax plan, it is designed to steer aggregate demand in a desired direction, which we will study in more detail later today. Macroeconomic policy is a term used to describe actions taken by governments to manipulate the economy to influence the level of inflation and unemployment. In addition to the balance of payments and stable, high 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 either policies aimed at influencing aggregate supply or policies aimed at influencing aggregate demand. We will study aggregate supply and aggregate demand in both the long run and short run and show their effects on macroeconomic policy. In this chart we can see that due to a decrease in income taxes, aggregate demand will shift to the right. from AD to AD1. Long-run aggregate supply is a vertical line that maintains Y at the natural rate of Y*, which in turn produces constant output and increasing prices, which is an effect of increasing 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 decrease while holding 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 a given since output increases from Y to Y1, increased growth creates jobs, hence an increase in employment, while keeping the price level constant at P...... middle of paper.. ....o act quickly and make it look favorable in the public eye. With the economy currently thriving, my first advice to Mr. Brown would be to forget about the good things and leave the income tax rate as is. However, as the election approaches, Mr. Brown wants to show me that he is doing something for me and that a tax cut will be welcomed by the public. Mr. Brown could consider cutting taxes, and in the long run, as noted above, the economy will hold the price level constant and increase production. It will be able to deal with resolving the long-term consequences of an increase in the price level and a return to the natural rate of income. after his election. To the non-economist, a reduction 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 goals and is only interested in the well-being of the UK economy, I would suggest maintaining the.