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)
Unlike monetary policy which is controlled by the federal reserves, fiscal policy is controlled by Congress and the administration. Which you could imagine would be very ugly to try and find some common ground since the left and the right have such different views on so many policies. The challenges I would see is that if the left and the right side were truly not seeing eye to eye on anything then this would create a difficult environment to help get anything passed to help with either raising taxes or decreasing taxes and deciding on which sectors the extra money would be spent you could say that the right would want extra spending on the military sector where as the left would want more spending in creating better healthcare for the people. I believe both are equally important but those are some of the challenges I would see them having to face. (Miller, R.L., 2016)
Exactly 10years ago the economy crashed, the housing market crashed and so did wall street. Everything was gone. People lost their jobs left and right along with their houses. There wasn’t even equity in the house you had bought because the houses had become so far upside down that everyone was just flat out broke. Even the rich were considered “broke” at this time. Nothing was flourishing, everything just crashed and burned. This was cause by the big banks approving loans to people who didn’t have the money to pay them back, this happened because Wall Street sold trillions of dollars of fraudulent securities. All of this lead us to a $211 dollar fiscal gap debt. Fiscal gap is the gap between our already debt and our (IOU’s that we are still planning to spend. So, with this information I would say that in the past 10 years nothing has really changed, sure unemployment is down but our country is still in a significant amount of debt and it doesn’t look like there is an end in sight any time soon. (Kotlikoff and Burns, 2012)
So, in conclusion before we start going any more off topic, fiscal policy plays a very important role in our economy and society. It helps alleviate some of the pressures on our economy and sometimes it can make it worse, it just depends on who is implementing the polices and for what purposes. The branch implementing the policies must also have a feel for the economy to make sure they are implementing the right policy at the right time otherwise the policy will fail and have the opposite desired effect which most of the time will lead to a loss of money and a bigger recession. Because if they lower the taxes to much we could go broke as a country if they taxed the people to much there could be anarchy. It is always a checks and balances system. Again, it is not very black and white and it is not always easy to understand that policies should be implemented and when.
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