...Fiscal policies are utilized to influence the economy via the government revenue and taxes; two types are discussed in Chapter 31, expansionary and contractionary. Expansionary fiscal policies are utilized during a recession to lower taxes, increase the aggregate demand, government spending, and real GDP. The overall goal is to determine the direction of the country; expansionary fiscal policies create budget deficit when it is balanced at the outset. The expansionary policy will close a recession gap, increase spending and create an aggregate demand curve because the people have money for spending on products and services; thereby, increasing the economic condition of the country. For example, when the unemployment rate is high, the government, specifically the Federal Reserve & the U.S. Treasury will boost the economy by increasing the amount of money supplied to the U.S. and reduce the discount rate, and reserve. On the other hand, the contractionary fiscal policies control demand-pull inflation and restrict government spending by increasing taxes. The overall goal of a contractionary fiscal policy is to lower aggregate demand and inflation; creating a budget surplus. In other words, it does the opposite of an expansionary fiscal policy to sustain the economic condition by decreasing the aggregate demand curve for products and services. Unfortunately, it slows the growth of the economy because the people have less income for spending (McConnell, Brue, & Flynn, 2015)...
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...Wells 2009) a brief explanation of fiscal policy is when the government uses taxes, government transfers and government purchases of goods and services to shift aggregate demand curve to the right to help heal the economy. (Reem Heakal 2010) describes it in simpler terms as the means by which the government adjusts its levels of spending in order to monitor and influence a nation’s economy. It is the sister strategy to monetary policy with which a central bank influences a nation’s money supply. Reem Heakal 2010 explains that Keynesian economics in theory can influence the macro economy by influencing productivity levels by increasing or decreasing taxes and public spending. This fiscal policy is set in place to get the economy back on track by increasing consumer spending and lowering unemployment. There are tools in the fiscal policy. Ex.: Is an investment tax credit which is a tax break to consumers. (Finishing the Job 2010) talks about the economic crisis was aided with swift stimulus packages to 130 million Americans and continued to find creative ways to unfreeze the credit markets. To summarize fiscal policy is too used to: Stimulate the economy, return to full employment, stabilize prices and combat inflation. Expansionary and contractionary means what it sounds like. We want to expand the economy and aggregate demand (A shift to the right in the demand curve) with government spending thus balancing it with contractionary policy ( A shift to the left in the demand...
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...Keynesians and Monetarists over the Effectiveness of Fiscal and Monetary Policy in the Is-Lm Framework In: Business and Management Keynesians and Monetarists over the Effectiveness of Fiscal and Monetary Policy in the Is-Lm Framework Discuss the difference between Keynesians and monetarists over the effectiveness of fiscal and monetary policy in the IS-LM framework. Introduction In economics there are two main schools of thought; these schools differ in their belief of what policies are best suited to attain full employment in the economy. Keynesians tend to favour demand side policies and are more prone to intervene in the market and therefore prefer to use fiscal policy whilst monetarists believe adjustments in money supply is more appropriate in stabilising the market ,therefore preferring monetary policy. In this essay I will discuss the views of Keynesians and monetarists regarding the effectiveness of monetary and fiscal policies in controlling aggregate demand through the IS-LM framework. I will first provide a brief description of the curves explaining their formation and what they represent and then I will go on to examine monetary and fiscal policy within the IS-LM framework. Finally, I will examine the views of monetarist and Keynesians regarding the effectiveness of both policies in raising the level of national l income and also consider the extreme cases. IS-LM framework The IS-LM model was initially developed by John Hicks in 1937 but was made popular...
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...European Fiscal Policy: Coordination of fiscal policy in Eurozone Wibowo Suhaidi (1235036) Tilburg University Course: Financial Economics Professor: S.C.W. Eijffinger October 2011 ABSTRACT The Stability and Growth pack has been discussed extensively in determining whether it is sufficient to undermine fiscal policy coordination in the Eurozone. Even before the recent sovereign debt crisis hitting the Eurozone the SGP has been in much of critics and the current situation calls for deeper analysis on the SGP and whether more coordinated fiscal policy in Eurozone is necessary in strengthening fiscal policy framework. This paper analyzes the implementation of fiscal policy in Eurozone with the SGP as the guideline and found out that despite effectively maintain the budgetary balances of Eurozone countries, the SGP failed to deliver overall fiscal stability. Therefore, a more coordinated form of fiscal policy is required in order to achieve the goal of fiscal stability in Eurozone. 1 I. Introduction The formation of European Monetary Union and the adoption of Euro as the single currency have the consequence that member countries are losing their monetary policy independence at the national scope. Therefore, one possible solution is to use fiscal policy in order to mitigate the asymmetric shocks, as fiscal policy is still on the hand of the national government of each member countries. However, from the Monetary Union point of view it is not desirable to...
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...Fiscal Policy ECON372 Fiscal Policy Fiscal policy is the government’s way of stimulating or slowing down the economy. Actions taken by the government can slow growth if things are moving too fast or stimulate growth if the economy is in a lull. Walmart, a major retailer in the United States, is one of the many organizations that are influenced by fiscal policies. Tax rates and spending can affect the organization’s ability to sell goods and services as well as create jobs for the economy. Based on fiscal policies implemented and economic predictions, there are a few recommendations that can be made to Walmart in order to positively influence the economy and their business. Federal Government Spending Fiscal policy is changes in government spending and taxes in order to influence the economy in some way. It works by changing the level or composition of aggregate demand (AD). Government spending in the United States has steadily increased from 7% of GDP in 1902 to almost 40% today (Chantrill, 2015). A decent amount of federal spending has gone for health care, education, pensions, and welfare programs. Defense spending in the United States has fluctuated in the last century, rising from 1% of GDP, peaking at 41% in World War II, declining from 10 percent in the Cold War to five percent today (Chantrill, 2015). Government spending on education has expanded from about one percent of GDP in 1900 to peak at 6 percent in the second decade of the 21st century. Government...
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...Fiscal Policy Paper Juan Mendez ECO/372 November 10, 2013 Adelaida-Torres-Dilan Fiscal Policy Paper This paper will detail how and why the U.S. deficit, surplus and debt have an impact on the U.S. Economy. The effect of deficits, surplus, and debt can impact unemployment and University of Phoenix in many different ways. A budget deficit occurs when the government spending exceeds the revenue in a given time period. A budget surplus occurs when the government spending is less than the revenue in a given time period. The national debt is a running total of all deficits minus all surpluses. The United States borrows money by having the Department of treasury issue treasury bonds and then the bonds are purchased by U.S. companies, individuals, and foreign governments, companies, and individuals. The size of the federal deficit/surplus is very sensitive to the business cycle in the United States. Larger deficits during recessions and smaller deficits during expansions are part of the normal up and down movement of the United States Debt. Automatic stabilizers of the economy are included as part of the annual budget and include payments such as unemployment benefits, food stamps, and other welfare benefits. These automatic stabilizers usually increase during a recession and decrease during an expansion. Income tax revenue is also considered an automatic stabilizer because tax revenue usually decreases during a recession and increases during an expansionary period...
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...Y V Reddy: Fiscal policy and economic reforms Address by Dr Y V Reddy, Governor of the Reserve Bank of India, at the National Institute of Public Finance and Policy (NIPFP), New Delhi, 26 May 2008 (edited transcript). * * * Respected Professor Govinda Rao and distinguished scholars, I am honoured by my friend, Prof. Govinda Rao’s, kind invitation to me to visit the National Institute of Public Finance and Policy (NIPFP). I had the opportunity of working very closely with the NIPFP on several occasions. Apart from my personal affinity to the NIPFP, there is a close relationship between the Reserve Bank of India (RBI) and the NIPFP, from an institutional point of view also. For instance, Prof. Govinda Rao is a Member of the Southern Local Board of RBI. Initially, I thought of speaking on fiscal policy and economic reforms from a central banker’s perspective. I realised later that while I have been working as a central banker over the last one decade, I had worked for most parts of the three decades prior to that in the Ministry of Finance, in the Government of India as well as in the Government of Andhra Pradesh. So it was a difficult choice for me as to whether I should give a fiscal view of the monetary policy or a monetary view of the fiscal policy. I have worked for a short period in the World Bank, which gives a global governments’ view and also in the IMF, which gives a global monetary authority’s view. As a via-media, I have opted to give a practitioner’s perspective...
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...is fiscal policy and how can it be used to manage the economy? Briefly describe the current UK fiscal policy, and comment on the effect it may have on the economy. Fiscal policy is the use of government spending, taxation and borrowing to influence the level and growth of aggregate demand, output and employment. Aggregate demand (AD)= Consumption + Investment + Government spending + (Exports – Imports). Changes in fiscal policy affect both aggregate demand and aggregate supply. (Riley 2006) Fiscal policy is used to achieve macroeconomic objectives such as full employment, price level stability and sustained economic growth. Expansionary fiscal policy is an increase in government expenditures or transfer payments, or a decrease in tax revenue. A tax cut will increase AD because it increases households’ disposable income. The greater the disposable income the greater is the quantity of goods and services demanded and therefore the greater is AD. This will stimulate economic growth in a recession, which will shift the AD curve to the right. (Parkin, Powell and Matthews 2008) The magnitude of the shift = expenditure multiplier x the increase in government expenditures. In the short run it will increase both Gross Domestic Product (GDP) and the price level. An increase in the price level will increase the money wage rate, which reduces the SRAS. The SRAS curve shifts left until in the long run real GDP = potential GDP at a higher price level. Contractionary fiscal policy is the...
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...Fiscal Policy 1. Meaning of Fiscal policy Fiscal policy refers to the way government utilizes taxation and spending with the aim of influencing the overall economy. Usually, the government use fiscal policy to ensure strong and sustainable economic growth and reduce poverty (Horton & El-Ganainy, 2009). The function and objectives of fiscal policy have increasingly gained popularity in the current financial crisis as most governments have stepped in to promote financial systems, jump-start growth, and solve the implications of the crisis on vulnerable groups. The main goals of fiscal policy include * Maintain low rate of inflation * Stimulate economic growth especially during economic recession * Typically, fiscal policy works to stabilize economic growth, bust economic cycle and avoid a boom 1. Responsibility for fiscal policy The executive (the president) and the Congress are responsible for fiscal policy 2. Difference between fiscal policy and monetary policy Fiscal policy is concerned with changes in taxation and changes in federal government purchases while monetary tool is involve shifts in supply of money and in the interest rates. Both the monetary and fiscal instruments are aimed to achieve favorable macroeconomic policy goals. When policymakers aim to affect the economy, they manipulate the fiscal policy and the monetary policy. The central of bank any country indirectly influences activity by changing the quantity of money under circulation...
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...Topic 4 – Fiscal Policy Refers to the governments choices regarding the overall level of government purchases or taxes * Government spending – on health sector, education, infrastructure, defence. * Taxation policy – income tax, sales tax (VAT), corporate tax, capital gains tax. Fiscal policy and aggregate demand * Government spending – increase in G spending → AD shifting right * e.g. Gov places £10 billion order for new school buildings → building contractor has increased demand for output → hires more staff and increases production. * Taxation – * Income tax cut → consumption increases → AD shifting right * Corporate tax cut → investment increases → AD shifting right * If tax cuts are seen as temp then AD shift may be smaller Multiplier Effect The additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending. * Example continued… * Positive impact - The Gov buys £10 billion of buildings from Bob and Co, → demand from gov raises employment and profits at Bob and Co → as workers see higher earnings and firm owners see higher profits → increase own spending on consumer goods and so on… This is the multiplier effect. * Negative impact could be that spending on foreign goods may increase → neg impact on AD as imports increase. * Size of multiplier depends on marginal propensity to consume and import. * SHOW IMPACT OF MULTIPLIER...
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...1. What is fiscal policy? Fiscal policy is the use of government spending and consumption to influence the economy. We can also summaries fiscal policy as government policy that affects the macroeconomic condition. Government usually uses fiscal policy to improve unemployment rate, control inflation and to promote strong growth in the economy. 2. How can it be used to get the economy out of recession? First, the government may lower the tax rates to increase the economic growth. If less money is paid on taxes people have more money to spend or invest which will help to improve the economic growth. Secondly, increasing government spending also will help. Additional government spending will create more job opportunities, which will lower the unemployment rate. 3. How can it be used to get the economy out of the situation where the economy is in an expansionary period where we exceed long run potential. Expansionary fiscal policy will lead to an increase in government budget deficit. In this case government should decrease its spending and increase taxes. Lower government spending will decrease the aggregate demand. Increasing taxes and reducing government spending will decrease government’s budget deficit. 4. Do both situation results on different impact on inflation? Why or Why not? Yes, both situations result on different impact on inflation. Expansionary fiscal policy lead to inflation because of the higher demand of the economy, which is caused by higher...
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...Measuring Economic Health and Fiscal Policy Paper The GDP is used to measure the business cycle of an economy. GDP is the value of all services and goods made within a country in a specified time period. GDP includes all and public and private spending, government use, investments, and exports minus imports within a country. GDP is for measuring the economy of one country. The GDP is the key factor in any business cycle. The business cycle is figured out by the goods and services and the number of people employed. The business cycle is like an aggregate economic indicator and the GDP is the best one. The business cycle changes and has five stages: growth, peak, recession, trough, and recovery, and the GDP affect the business cycle because its factors affect the business cycle. When the GDP rises in the economy there is a growth in the business cycle, and when there is a fall in the GDP then there is a recession in the business cycle. (Hubbard & O’Brien, 2010) The government has a major part in shaping our national fiscal policies. The President and Congress make fiscal policies to help our economy. The Federal Open Market Committee monitors the economy. The Internal Revenue Service is a department that is in charge of making sure that everyone pays their share of taxes. The Federal Trade Commission department monitors all deals that have acquisition mergers, credit and loans, and regulate debt collection, example Enron. The Department of Treasury manages finances...
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...Reserve's recent policy decisions and place these actions in an international context. what happens when there is a surplus of imports brought into the U.S.? what is a specific product with an import surplus, and the impact that has on the U.S. businesses and consumer involded. The U.S. economy has faced significant headwinds, and, although the economy has been expanding since mid-2009, the pace of our recovery has been frustratingly slow. The headwinds include the effects deleveraging by households, the still-weak U.S. housing market, tight credit conditions in some sectors, spillovers from the situation in Europe, fiscal contraction at all levels of government, and concerns about the medium-term U.S. fiscal outlook. In this environment, households and businesses have been quite cautious in increasing spending. Accordingly, the pace of economic growth has been insufficient to support significant improvement in the job market; indeed, the unemployment rate, at 7.8 percent, is well above what we judge to be its long-run normal level. With large and persistent margins of resource slack, U.S. inflation has generally been subdued despite periodic fluctuations in commodity prices. Consumer price inflation is running somewhat below the Federal Reserve's 2 percent longer-run objective, and survey- and market-based measures of longer-term inflation expectations have remained well anchored. The global economic outlook also presents many challenges, as you know. Fiscal and financial...
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...important. Policy makers judge the economy by measuring these macroeconomic indicators. The performance of the economy is measured in terms of the achievement of its economic objectives. Policy makers develop fiscal and monetary policy to achieve these long term objectives of the economy. Fiscal Policy Fiscal policy is used to collect revenue for the government in terms of taxes. Main tools of fiscal policy are taxes and government spending. If government make any changes in tax structure and government spending it effect the aggregate demand and level of economic activity in the country. To stabilize the economy on a business cycle fiscal can be used. Fiscal policy is made under the law of a legislature. Making any changes in the fiscal policy tools it effects the level of activity and aggregate demand in the country, it also effect the savings and investment in the economy, and distribution of income. * Expansionary fiscal policy In expansionary fiscal policy government increases spending and decrease taxes. To correct the problem in business cycle transfer payments are increased. Expansionary fiscal policy is used to close the recessionary gap, to decrease unemployment and improve the economic condition during recession. * Restrictive fiscal policy In restrictive fiscal policy government increases taxes and decrease its spending and transfer payments to resolve the problem of inflationary gape in the business-cycle expansion. The goal of restrictive policy is to...
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...Fiscal and Monetary Policy The textbook states clearly that the aggregate supply curve (and the economy in general) is heavily influenced by unemployment: “The Keynesian range of the curve is horizontal because neither the price level nor production costs will increase or decrease when there is substantial unemployment in the economy.” (Tucker) This shows that high unemployment should be prevented as much as possible, and quickly alleviated if it begins to rise. “Our Fiscal Policy Paradox”, written by Alan S. Blinder, explores the current fiscal and monetary policy options, and describes which options should be implemented in order to pull the economy out of the recession. The fiscal options that are given are: 1. New jobs tax credit 2. Government hiring 3. Cut sales taxes The tax credit for new jobs would simply be an incentive for employers to hire more people in order to decrease unemployment, which will increase spending in general, a key factor in pulling the nation out of its economic trough. This strategy has been pursued, but not effectively. The author explains: The government could offer tax breaks to firms that increase their employment above some base level. In fact, Congress did just that with the HIRE (Hiring Incentives to Restore Employment) Act in March. But it was legislated on a pitifully small scale and will expire at year's end. We need a larger version that stays around for a while. (WSJ.com) Providing such a credit would theoretically...
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