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FISCAL policy is the use of government spending and taxation to infl uence the economy. Governments typi-cally use fi scal policy to promote strong and sustain-able growth and reduce poverty.
Introduction to U.S. Economy: Fiscal Policy. What Is Fiscal Policy? Fiscal policy is the means by which the government adjusts its budget balance through spending and revenue changes to influence broader economic conditions.
Fiscal policy affects aggregate demand, the distribution of wealth, and the economy’s capacity to produce goods and services. In the short run, changes in spending or taxing can alter both the magnitude and the pat-tern of demand for goods and services.
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- What Is Fiscal Policy?
- Understanding Fiscal Policy
- Types of Fiscal Policies
- Downside of Expansionary Policy
- Fiscal Policy vs. Monetary Policy
- The Bottom Line
Fiscal policy refers to the use of government spending and tax policies to influence economic conditions, especially macroeconomicconditions. These include aggregate demand for goods and services, employment, inflation, and economic growth. During a recession, the government may lower tax rates or increase spending to encourage demand and spur econ...
U.S. fiscal policy is largely based on the ideas of British economist John Maynard Keynes(1883-1946). He argued that economic recessions are due to a deficiency in the consumer spending and business investment components of aggregate demand. Keynes believed that governments could stabilize the business cycleand regulate economic output by adjusting...
Expansionary Policy and Tools
To illustrate how the government can use fiscal policy to affect the economy, consider an economy that's experiencing a recession. The government might issue tax stimulus rebates to increase aggregate demandand fuel economic growth. The logic behind this approach is that when people pay lower taxes, they have more money to spend or invest, which fuels higher demand. That demand leads firms to hire more, decreasingunemployment, and causing fierce competition for labor. In turn, this serves to...
Contractionary Policy and Tools
In the face of mounting inflation and other expansionary symptoms, a government can pursue contractionary fiscal policy, perhaps even to the extent of inducing a brief recession in order to restore balance to the economic cycle. The government does this by increasing taxes, reducing public spending, and cutting public sector pay or jobs. Where expansionary fiscal policy involves spending deficits, contractionary fiscal policy is characterized by budget surpluses. This policy is rarely used, h...
Mounting deficits are among the complaints lodged against expansionary fiscal policy. Critics complain that a flood of government red ink can weigh on growth and eventually create the need for damaging austerity. Many economists simply dispute the effectiveness of expansionary fiscal policies. They argue that government spending too easily crowds o...
Fiscal policy is the responsibility of the government. It involves spurring or slowing economic activity using taxes and government spending. Monetary policy is the domain of the U.S. Federal Reserve Boardand refers to actions taken to increase or decrease liquidity through the nation's money supply. According to the Federal Reserve Board, these ac...
Fiscal policy is directed by the U.S. government with the goal of maintaining a healthy economy. The tools used to promote beneficial economic activity are adjustments to tax rates and government spending. When economic activity slows or deteriorates, the government may try to improve it by reducing taxes or increasing its spending on various gover...
Fiscal policy is the government’s most powerful tool to achieve distributional objectives. Tax and spending policies must be designed wisely to minimize any adverse effects on incentives to
Fiscal policy is the means by which the government adjusts its budget balance through spending and revenue changes to influence broader economic conditions.
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