"The use of government revenue expenditures to influence macroeconomic variables developed in reaction to the Great Depression of the 1930s, when the previous laissez-faire approach to economic management became unworkable."
This topic discusses the two types of fiscal policy: expansionary fiscal policy and contractionary fiscal policy. It explores when each type is used and their impacts on the economy.
Definition of Fiscal Policy: Fiscal policy refers to the government's means of managing the economy by adjusting its spending levels and tax rates in order to influence economic activity.
Expansionary and Contractionary Fiscal Policy: Expansionary fiscal policy involves increased government spending and/or decreased taxes, while contractionary fiscal policy involves decreased government spending and/or increased taxes.
Automatic Stabilizers: Refers to certain government policies, such as unemployment benefits and progressive income tax rates, that tend to automatically stabilize the economy during a recession or inflation.
Multiplier Effect: The multiplier effect refers to how a change in government spending or taxes can cause an even greater change in total economic activity.
Crowding Out Effect: Crowding-out occurs when increased government spending results in higher interest rates, which in turn reduces private sector investment.
Time Lags: Fiscal policy can be subject to long time lags, as the government can take significant time to implement changes which in turn may not immediately have a significant effect.
Fiscal and Monetary Policy Coordination: Fiscal and monetary policy need to be synchronized in order to achieve optimal results in the economy.
Political Economy of Fiscal Policy: Fiscal policy can be shaped by political considerations or be subject to manipulation by certain interest groups.
Fiscal Responsibility: Fiscal responsibility refers to the responsible use of government resources, whereby sustainable budget deficits and debt can best be achieved.
International Dimensions of Fiscal Policy: Fiscal policy can have an impact beyond national boundaries and can create ripple effects in the global economy.
Expansionary fiscal policy: This type of fiscal policy is implemented when the economy is experiencing a slowdown, and the government increases its spending, reduces taxes or both to stimulate economic growth.
Contractionary fiscal policy: This type of fiscal policy is implemented to cool down an overheating or inflationary economy. The government reduces its spending, increases taxes or both to slow down the growth of the economy.
Automatic stabilizers: These are policy measures that are built into the economy, and they adjust automatically to fluctuations in economic activity. Examples of automatic stabilizers include unemployment benefits, progressive income tax, and transfer payments.
Investment tax credits: These are tax credits given to businesses that invest in new capital equipment, such as machinery or buildings. The aim of this fiscal policy is to encourage investment in the economy.
Discretionary fiscal policy: This refers to government policies that are decision-based rather than automatic. The government can decide to use increased or decreased spending or tax cuts to stimulate or slow down the economy.
Balanced budget fiscal policy: Under this policy, the government aims to match its spending with its revenue so that it is neither running a budget deficit nor a budget surplus.
Unbalanced budget fiscal policy: Under this policy, the government aims to generate a budget deficit or budget surplus by deliberately increasing or decreasing its spending or taxes.
Countercyclical fiscal policy: This refers to government policies that are implemented to offset the natural business cycle of the economy. It involves increasing or decreasing government spending or taxes to stabilize the economy during times of recession or inflation.
Keynesian fiscal policy: This type of fiscal policy focuses on stimulating the demand side of the economy by increasing government spending or cutting taxes. Its aim is to increase employment, output, and overall economic growth.
Supply-side fiscal policy: This type of fiscal policy focuses on stimulating the supply side of the economy. It involves measures such as reducing taxes on businesses or individuals, reducing regulations, and encouraging investment. Its aim is to increase productivity and long-term growth.
"Fiscal policy is based on the theories of the British economist John Maynard Keynes, whose Keynesian economics theorized that government changes in the levels of taxation and government spending influence aggregate demand and the level of economic activity."
"Fiscal and monetary policy are the key strategies used by a country's government and central bank to advance its economic objectives."
"Changes in the level and composition of taxation and government spending can affect macroeconomic variables, including: - Aggregate demand and the level of economic activity - Saving and investment - Income distribution - Allocation of resources."
"Fiscal policy deals with taxation and government spending and is often administered by a government department; while monetary policy deals with the money supply, interest rates and is often administered by a country's central bank."
"It is designed to try to keep GDP growth at 2%–3% and the unemployment rate near the natural unemployment rate of 4%–5%. This implies that fiscal policy is used to stabilize the economy over the course of the business cycle."
"The previous laissez-faire approach to economic management became unworkable during the Great Depression of the 1930s."
"Fiscal policy is used to stabilize the economy over the course of the business cycle."
"Fiscal policy is based on the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country's economy."
"Fiscal policy is based on the theories of the British economist John Maynard Keynes, whose Keynesian economics theorized that government changes in the levels of taxation and government spending influence aggregate demand and the level of economic activity."
"Inflation is considered 'healthy' at the level in the range 2%–3%."
"Fiscal policy is designed to increase employment."
"The unemployment rate near the natural unemployment rate of 4%-5% is targeted by fiscal policy."
"Both fiscal and monetary policies influence a country's economic performance."
"The use of government revenue expenditures to influence macroeconomic variables developed in reaction to the Great Depression of the 1930s."
"The previous laissez-faire approach to economic management became unworkable during the Great Depression of the 1930s."
"Fiscal policy can affect macroeconomic variables, including aggregate demand and the level of economic activity, saving and investment, income distribution, and allocation of resources."
"Government revenue collection (taxes or tax cuts) and expenditure are the primary tools of fiscal policy."
"Fiscal policy is often administered by a government department."
"Fiscal policy deals with taxation and government spending, while monetary policy deals with the money supply and interest rates."