...guideposts of economic thinking to government spending and taxation Well from reading this week reading, the economic way of thinking requires more than just making decisions on plain information. For it requires government incorporating certain guidelines such as the building blocks of basic economic theory into their thought process when making decisions. There are eight principles that characterize the economic way of thinking; however, I will only identify four. According to the textbook” “One of the first guidelines is referred to as the use of scare resources is costly, so decision-makers must make trade-offs. Economists sometimes refer to this as the “there is no such thing as a free lunch” principle, it is important to recognize that the use of scarce resources to produce a good is always costly” (Gwartney et.al, 2013). In economics, the opportunity cost of an action is the highest valued option that is given up when choices are made in economic thinking. 2. When government make decisions, they should make decisions on the margin of how much it is going to cost and which option seems like the most economical way. “When making a choice between two alternatives, individuals generally focus on the difference in the cost and benefits between alternatives. Economists describe this process as marginal decision-making, or thinking in such cases” (Gwartney et al, 2013). 3. Having information on the economic factor that helps government make better decisions in economic...
Words: 377 - Pages: 2
...Fiscal policy deals with spending money and government earning. The tools that the government uses are taxing and spending. The goals of fiscal policy are to make businesses produce more by creating demands in the economy. 2. The difference between fiscal and monetary policy is monetary policy is focused more on buying/selling government securities to control money supply. On the other hand, fiscal policy is controlled by the president and Congress and they deal with taxes and government spending. 3. I do think that the government should create a law mandating a balanced federal budget because it will prevent us from going into so much debt like we are now by being in debt to China. Scenario #1 The government is currently spending three billion, one hundred million on programs and brings in three billion, five hundred million through taxation. 4. This is a budget surplus because although the government is spending money, it is bringing in more money through taxation than it is spending. 5. As a member of congress, we would make an increase on taxes. I also it would make a decrease amount on what the government spends. 6. I think that the benefit would be the government would be making more money through taxation but it would also cause problems to economic growth because people would be having to pay more, princes would range all over the place and people might become unemployed. Scenario #2 The government is currently spending three billion, seven...
Words: 495 - Pages: 2
...Taxation is said to be one of the key governance tools of any state including the upholding of Zambians sovereignty. INTRODUCTION The most fundamental function of taxation is raising revenue to pay for governmental expenses and programs. "Taxes are necessary to raise revenue for public goods and infrastructure, as well as to provide other sorts of public services conducive to general welfare and economic growth." Tax revenues pay for the necessary goods – like national defense or a legal system – that an unregulated market cannot provide by itself. More often overlooked is the role of taxation as a catalyst for the development of responsive and accountable government, and for the expansion of state capacity. Taxes, however, do more than simply raise revenue: "Any tax that produces revenue will in some way alter the social and economic order." Taxes that only raise revenue without effecting other changes do not exist in the real world. The concept of fiscal policy captures that link between revenue collection and government spending. More specifically, taxes can be used to increase or decrease inflation and purchasing power, stimulate investment, and prevent harmful concentrations of wealth. Taxation is an underrated tool in the effort to build more capable and responsive states. The role of taxation as a central force in the development of democracy resonates strongly in Anglo-American history. The duty of paying for government legitimizes demands for services...
Words: 2844 - Pages: 12
...The concept of fiscal policy is the level of government spending and taxation set by the president and congress. Fiscal policy contains short term and long term effects; short run effects include fiscal policy on aggregate demand for goods and services. Long term effects are better saving and investments over the period of time. The government goes about changing the prices to obtain a stable prices, low unemployment and high growth. In the united states the legislative and executive branch is in charge of putting the policy in place. Fiscal policy can be used to stimulate a sluggish economy or slow down an economy that is growing too rapidly. Prior to the Great Depression the nation maintained economic stability by sustaining a balanced budget, soon they found out that more had to be done. President Roosevelt was the first to apply fiscal policy into the government’s economic system. When this policy was first implemented it didn’t seem to have great success and scholars report this was in part of the current economic condition as this was during the middle of the Great Depression. The late 1930’s proved to be the point when the fiscal policy was out into place most effectively. As WWII started employment rose, and the New Deal was implemented. This allowed government relief and new government organizations. The New Deal is actually what fueled the progress of fiscal policy. This was the first the government had intervened to help the citizen’s with their financial burdens...
Words: 798 - Pages: 4
...Economic health can be comprehended by knowing the significance of gross domestic products, fiscal policies, the effect of fiscal policies on the economy, and how the modifications in government spending and taxes influence the market assembly of employment. GDP to Measure Business Cycle In economics the term business cycle is used to refer to the cyclical fluctuations in gross domestic product (GDP). GDP is a monetary measure of the economy’s production, valued using the prices from a selected base year (Rummery, 2002). When there is a increase in GDP it expands the business cycle, which allots them a stage of development. When there is a reduction in GDP its business cycle can experience a cycle of recession. A business cycle has four phases; expansion, peak, recession, and trough. Each stage is of an uncertain span of time, varying from weeks to years (Rummery, 2002). However, when looking at historical data, the economy seems to move from one point to another in a rather cyclical manner, hence the term business cycle. Government Bodies That Determine Fiscal Policies Fiscal policy is the option applied by governments concerning the stages of government purchases and taxes. Fiscal policies contain control on aggregate demand so when the government alters our fiscal policies, government spending or our...
Words: 536 - Pages: 3
...Role of the Central Banks and their involvement with Government Fiscal Policy Introduction: The central bank is the public sector bank of a country which owned by the government and not by the private sector. It is responsible for major financial, economic status of a country. It is also responsible for various policies that control the economic situation of a county which includes the monetary and the fiscal policy which are intended to run a country with at a stable state of economy. The central bank has also has the responsibility for the issue of currency and also holds hold deposit it for other private sector banks. Examples of Central banks: The bank of Canada, Federal reserve, European central bank, the bank of England, The reserve bank of India etc. The Roles: Different central banks have some different goals but most of them have common goals. The major roles are setting up and marinating a monetary policy, fiscal policy and bank notes. These policies are created to maintain stability in an economy. Following the policy will intern takes its responsibility towards the next level by taking responsibility in maintaining price stability in an economy; it acts as the bank for the government. The central bank is the lender of loss resort and it controls the supply of money and taxation policies in an economy. It is responsible to monitor the banking system of the country. It controls the interest rates by buying selling of bonds, it also watches over the cash reserve...
Words: 435 - Pages: 2
...politically expedient method’’. Amendments have been made to the existing tax systems, usually when the government required more funds. Little if any planned or integrated thinking seems to have taken place. According to the Adam Smith Institute, Great Britain has the most complex tax system in the world, which is largely believed that is roughly five times as long as the German tax code (Geraint Jones, 2011) Currently, governments request to use taxation in some situations for purposes which is different than raising funds to cover up its expenditure. To begin with, the economic resources, which are accessible for the nation are limited, thus a raise in government spending usually leads to a decrease in private expenditure. In addition to this, one technique of transferring recourses from the private to the public sector is the use of taxation, but there are also further methods. One of these alternative methods is the degradation of the currency through the creation of additional money, but the main problem of this method is that it leads to inflation. Moreover, an additional alternative option is for the government to charge the goods and services it offers. However, it is not possible to charge individuals directly on the basis of their utilization of many government services (James and Nobes, 2011). According to Musgrave (1959), the economic function of government may be separated into three major categories. First, is to overcome...
Words: 1985 - Pages: 8
...tools do they have at their disposable to impact the economy? Can you say that their objections are in tandem with one another or due they sometimes conflict? Please explain. tools available to the Federal government in managing the economy -- Fiscal and Monetary Policy Legislative Overview In Canada, the monetary policy is conducted by the Bank of Canada in which the government owned organization function with considerable independence from the federal government but is accountable to the parliament. Monetary policy in Canada is set by non-elected officials at Bank of Canada. Other decisions regarding the level of government revenue and expense is part of fiscal policy which is made by the Government of Canada with the approval of the parliament of Canada, as result monetary and fiscal policies are governed independent of each other (Frigon, 2010). The role of monetary policy is to preserve the value of capital by keeping inflation low, stable and foreseeable. This allows Canada to make spending and investment decisions with confidence, encourages long-term investment in Canada and contributes to better job openings and greater productivity with a better standard of living. Monetary policy in Canada has three characteristics: * Conducted by the Bank of Canada (government owned crown corporation) * Interest rates on similar assets are the same across all Canadian regions (One monetary policy for all of Canada) * Has only one policy instrument Canada’s monetary policy...
Words: 1686 - Pages: 7
...104 Dec. 17, 2015 One of the most sensitive areas in relation to government revenues is taxation. In most cases, increased taxes are met with serious oppositions from corporations and members of the public who feel the unfairness of the government through such actions. A good example is the recent decision made by the Massachusetts Senate on May 19 of this year where they voted to solidify the present income rate. The same to lower it opposes this to a plan. This action would help in saving more than 100 million dollars a year and the savings obtained would hence be used to benefit the middle and the low-income earners (Schoenberg). The proposal behind this plan is a progressive one, geared to benefit low-income earners. In order to carry this plan out, those earning high income would see an increase in their taxes. It is said that those earning more than 7778,000 would have to pay $961 more than those who are earning less (Schoenberg). Although many proposals just as this one are done through popular public opinion, it needs to be noted that the lack of education on the matter from our government creates a distorted reality as to who should and what should be taxed in order to increase revenue for spending. More importantly in our state of “tax-a-chusetts”, it is easy to believe that perhaps our government has lost balance over the concept of taxation and should scale back in order to decrease spending and the deficit we are currently in. In order to create revenue within...
Words: 1154 - Pages: 5
... This is due to the fact that the Australian government successfully managed to control the economy. During the recession, there is a recessionary gap which is the amount that aggregate expenditures fall short of the full-employment GDP. This fall in consumption will cause a decline in sales profit and revenue and cause some firms to collapse. In order to survive this harsh environment, firms will put more effort in saving cost which will cause an increase in the unemployment rate. The graph below will be used to illustrate the recessionary gap. E 45° C+I+G=AE C1+I1+G1=AE1 Real GDP Recessionary gap In order to fill up this recessionary gap, (http://news.bbc.co.uk/2/hi/8080446.stm) the government also introduced a number of multi-billion dollar stimulus packages, including increased infrastructure spending and cash handouts to most Australians since the end of last year to lift consumer spending. In addition, the recovery of the Chinese economy has once again created massive demand on commodities which has greatly boosted the regional share markets (http://news.bbc.co.uk/2/hi/8546717.stm). The stimulation will merely stimulate the economy but the effect will wear off and the crisis will be back. Sometimes, the effect of the fiscal policy is dependent on the country. Referring to Keiichiro Kobayashi, the Americans have a more positive outlook and they regain their confidence quicker. Therefore, their consumption spending will rise in a shorter time. In contrast, a more...
Words: 1769 - Pages: 8
...that governments take in the economic field. It covers the systems for setting levels of taxation, government budgets, the money supply and interest rates as well as the labor market, national ownership, and many other areas of government interventions into the economy. Most factors of economic policy can be divided into either fiscal policy, which deals with government actions regarding taxation and spending, or monetary policy, which deals with central banking actions regarding the money supply and interest rates. Fiscal policies: refers to the government's spending and taxation practices and impacts essentially every individual and business in the nation. Fiscal policy influences the, the size of your tax bill, the amount of money the average consumer can afford to spend via taxation. These fiscal policies can be divided into expansionary policies and tight policies * Expansionary policies: Refer to when businesses spend more than they take in from taxes and this is good for businesses because more government spending leads to more jobs for consumers or increased infrastructural investment e.g building roads. This is good for businesses because more individuals can afford their goods and services. Businesses would have greater sales while paying lesser taxes to government resulting in better net profits * contractionary policies: Refer to when government spends less and collect more taxes, meaning that businesses and individuals pay more taxes to government, contracts...
Words: 448 - Pages: 2
...eight guideposts of economic thinking to government spending and taxation has been especially persuasive, both because of improvements in statistical research techniques and because more data become available with each passing year. As the Organization for Economic Co-operation and Development explains, The empirical growth literature has developed substantially over the past two decades, drawing on larger and richer databases and exploiting better econometric tools to explain cross the country differences in growth performance Isolating the precise effects of one type of government policy-such as government spending-on aggregate economic performance is probably impossible. Moreover, the relationship between government spending and economic growth quite possibly depends on factors that can change over time. Another important element of the academic research is methodology. When scholars attempt to measure a relationship between government spending and economic performance, they can pursue this research in a number of ways. They can conduct a statistical test to ascertain a relationship between two or more variables, but this still leaves many questions. Are they testing to find a relationship over a period of time? Are they testing to find a relationship using cross-country data? Academics can also build complete economic models and then try to determine whether the evidence supports that model. But what kind of model? What are the assumptions in that model? Will the model...
Words: 968 - Pages: 4
...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 opposite of expansionary fiscal policy, which through a decrease in government expenditures or transfer payments, or an increase in tax...
Words: 1853 - Pages: 8
...Chapter 5: Government Expenditure and Revenue by Ooi Soon Beng After studying this chapter, you should be able to understand: Public Budget Budget Deficits and Surplus Expansionary and Contractionary Fiscal Policy Discretionary and Automatic Fiscal Policy National Debts and Its Issues and Misconceptions Problems with Fiscal Policy : Macroeconomics According to Keynes, government has to intervene to stabilize the economy. Stabilization can be achieved in part by manipulating the Public Budget to increase output and employment or to reduce inflation. The Budget outlines the government’s taxation and expenditure plans for the coming fiscal year. The Ministry of Finance are responsible for the preparation of the budget. Sources of Revenues: Direct taxes on individuals and companies Indirect taxes on goods and services (gasoline, alcohol, tobacco, etc) Non-tax revenue (stamp duty, licenses, permits, etc) Malaysia: Sources of Revenue (in RM) 1990 2013 2014 Direct Taxes 35.2% 56.5% 59.1% Indirect Taxes 36.7% 16.6% 17.2% Non-Tax Revenue 28.0% 26.9% 23.7% Total Revenue 29,521m 207,913m 224,094m Source: Ministry of Finance Categories of Expenses: Operating Expenditure (emolument, pensions, debt servicing, grant to states, subsidies, supplies, scholarships, etc) Development Expenditure (security, social services, economic services, expenditure ...
Words: 2314 - Pages: 10
...late 2009. In spite of these gains, however, the job market remains generally weak, with the unemployment rate well above its longer-run normal level. About 4.7 million of the unemployed have been without a job for six months or more, and millions more would like full-time employment but are only able to find part-time jobs. High unemployment has substantial costs, including not only the hardship faced by the unemployed and their families, but also the harm done to the vitality and productive potential of our economy as a whole. The loss of output and earnings associated with high unemployment also reduces government revenues and increases spending, thereby leading to larger deficits and higher levels of debt. The problem started when the collapse in housing prices led to a series of defaults on mortgage-backed securities. To sustain that situation the United States government has been taking measures to support the economy, but without much effect. Another problem the economy has faced is high gasoline prices. Currently gas prices are down but recently we had an increase which reflected both higher crude oil...
Words: 1473 - Pages: 6
