Chapter 15: Problem 3

What is meant by the terms expenditure changing policy and expenditure switching policy? Give some examples of each.

Short Answer

Expert verified

In fiscal policy, an expenditure changing policy refers to the government changing its level of spending or tax rates to influence the economy, stimulating growth or slowing it down. Examples include infrastructural development or increasing taxes. An expenditure switching policy, on the other hand, is designed to switch spending from foreign goods to domestic alternatives, often through manipulating exchange rates or tariffs. Examples include devaluation of a country's currency or imposition of tariffs.

Step by step solution

Define Expenditure Changing Policy

An expenditure changing policy is related to fiscal policy, where government modifies its spending and tax rates to influence a nation's economy. The key objective is to either stimulate economic growth or slow it down, depending on the situation.

Provide examples of Expenditure Changing Policy

For instance, in a situation of economic recession, the government might decide to increase its expenditure on public works, such as infrastructural development, to stimulate economic activity and create jobs. Conversely, if the economy is overheating, the government may decrease its spending or increase taxes to slow down economic activity.

Define Expenditure Switching Policy

Expenditure switching policies are those designed to switch expenditure away from foreign goods and services towards domestically produced alternatives. This is often achieved through the manipulation of exchange rates, tariffs, or other trade regulations.

Provide examples of Expenditure Switching Policy

One typical example of an expenditure-switching policy is a devaluation or depreciation of a country's currency. This makes imports more expensive and exports cheaper, encouraging domestic consumption of local goods and boosting local industries. Another example could be the imposition of tariffs on imported goods, making local goods comparably cheaper, hence promoting domestic consumption and reducing the amount spent on imported goods.

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