Essay: Fiscal policy

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  • Subject area(s): Economics essays
  • Reading time: 4 minutes
  • Price: Free download
  • Published on: January 11, 2019
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  • Number of pages: 2
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We are going to go over the terms fiscal policy and the types of fiscal policy that can be implemented in helping the economy out of a recession or to help the government by raising taxes. From my understanding, not all of this is very black and white and easy to understand. So, I hope that I am following the information correctly and am able to explain the following questions that are outlined below.

The term fiscal policy means that the government will adjust spending levels and tax rates accordingly to help monitor the influences on the nation’s economy. Both branches of the government control fiscal policy. Its sister policy, monetary policy helps set the Federal Reserve to help influence the economy so that it meets its economic goals. Fiscal policy will increase or decrease revenue and expenditures to help influence inflation. The two main tools of fiscal policy are taxes, and spending. (Miller, R.L., 2016) Taxes will influence the economy by giving the government and the people a limit on how much they have to spend in certain areas. For example, if taxes decrease then it provides families with a little extra spending money which in turn the people will spend on goods and services which helps spur the whole economy. Spending on the other hand is used more for fiscal policy to help drive money to certain parts of the sectors that need a little economic boost. But just like with taxes, the government hopes that it will be spent on goods and services. The key to fiscal policy is finding the right balance so that the economy doesn’t lean too far to the left or too far to the right. (Hyun, Park 2009)

There are two main types of fiscal policy that the government uses which are contractionary and expansionary. Contractionary fiscal policy is mostly used to help slow down the economic growth in an economy. This gets implemented when inflation is growing so fast that they have to use contractionary fiscal policy to raise taxes and cut spending. Expansionary fiscal policy is usually implemented when the economy is in a recession, usually when there are times of high unemployment and low spending by the people. Expansionary fiscal policy means to lower taxes, spend more government money or doing both. The goal with this policy is to help put more money in the hands of consumers so that the consumers will spend more money and help stimulate the economy, where does the extra money come from? expansionary fiscal policy gets financed thru the nations credit market to help boost the spending by the economy. (Miller, R.L., 2016)

The downside to using any fiscal policy does vary. Let take expansionary fiscal policy for example, if we increase the AD by implementing this policy then we will see an increase in real GDP which will cause a lower unemployment rate but the trade-off here is that there will be higher inflation as a result of this. This is just one example that I can think of where the expansionary policy would have a downside. But not every microeconomics theorist believed that the fiscal policies had downsides.

Monetary Policy on the other hand consists of a either a regulatory committee, actions that are controlled by a central bank, or a currency board. One of these would help regulate and determine the rate at which the growth of the money supply would happen which in turn would affect the interest’s rates. Monetary policy gets regulated through actions by modifying the interest rates, changing the amount of money a bank is required to keep at all times or the buying and selling of government bonds. Monetary policy is mostly controlled by the reserves. (Miller, R.L., 2016)

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