Fiscal Policy
Introduction
The economy fluctuations in today’s world have become one of the most important factors in determining the direction of an economy growth. Non-stable economy can harm and slow the development and growing rate of a nation. There are many tools to stabilize the economy and reduce the frequency and the altitude of economic fluctuations. Among these tools are the fiscal policy and monetary policy. This report discusses the fiscal policy and why the governments use this too to stabilize the economy and encounter the economic fluctuations.
Definition
Fiscal policy is a macroeconomic tool used by the government through the control of taxation and government spending in an effort to affect the business cycle and to achieve economic objectives of price stability, full employment and economic growth. By imposing taxes, the government receives revenue from the public which means the assets have been transferred from the public to the government. On the other hand, when the government spends money it transfers assets from itself to the public. So these two tools can be considered as opposite policies.
Types of Fiscal Policies
To explain the differences between the types of fiscal policies, the national income concept must be introduced. Then national income can be described by the following equation:
Y=C+I+G+NX ................ (1)
Where Y is the national income, C is the consumption spending, I is the investment spending, G is the government spending, and NX is the net exports. This equation can be expanded to represent the taxes as follows:
Y=C(Y-T)+ I+G+NX .............. (2)
Where C(Y – T) expresses that the consumption spending is based on both income and taxes. The disposable income refers to the money that can be spent on consumption after removing the taxes from the total income.
Since the government has the control of taxation and its spending, changes in the level and composition of taxation and government spending can lead to
The economy fluctuations in today’s world have become one of the most important factors in determining the direction of an economy growth. Non-stable economy can harm and slow the development and growing rate of a nation. There are many tools to stabilize the economy and reduce the frequency and the altitude of economic fluctuations. Among these tools are the fiscal policy and monetary policy. This report discusses the fiscal policy and why the governments use this too to stabilize the economy and encounter the economic fluctuations.
Definition
Fiscal policy is a macroeconomic tool used by the government through the control of taxation and government spending in an effort to affect the business cycle and to achieve economic objectives of price stability, full employment and economic growth. By imposing taxes, the government receives revenue from the public which means the assets have been transferred from the public to the government. On the other hand, when the government spends money it transfers assets from itself to the public. So these two tools can be considered as opposite policies.
Types of Fiscal Policies
To explain the differences between the types of fiscal policies, the national income concept must be introduced. Then national income can be described by the following equation:
Y=C+I+G+NX ................ (1)
Where Y is the national income, C is the consumption spending, I is the investment spending, G is the government spending, and NX is the net exports. This equation can be expanded to represent the taxes as follows:
Y=C(Y-T)+ I+G+NX .............. (2)
Where C(Y – T) expresses that the consumption spending is based on both income and taxes. The disposable income refers to the money that can be spent on consumption after removing the taxes from the total income.
Since the government has the control of taxation and its spending, changes in the level and composition of taxation and government spending can lead to