Preview

Use of Discretionary Fiscal Policy to Stabilise Fluctuations in Real GDP

Good Essays
Open Document
Open Document
341 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Use of Discretionary Fiscal Policy to Stabilise Fluctuations in Real GDP
Discuss how the government can use discretionary fiscal policy and automatic stabilisers to stabilise fluctuations in real GDP. What tools does the government have at its discretion to stabilise the economy? Suppose the government decides to decrease income taxes. Show in a diagram and explain how this policy will lead to an increase in real GDP. Explain how potential output may be affected.
A discretionary fiscal policy refers to deliberate changes in the level of government spending, transfer payments or in tax rates in order to achieve macroeconomic goals such as full employment, price stability, and economic growth. An expansionary fiscal policy is designed to close a recessionary gap by changing aggregate expenditures such as an increase in government purchases or decreasing taxes. A contractionary fiscal policy might involve a reduction in government purchases or transfer payments, an increase in taxes, or a mix of all three to shift the aggregate demand curve to the left, which results a real boost in actual GDP level and helping the economy to recover. Automatic stabilisers refer to the tendency for a system of taxes and transfers, which are related to the level of income to automatically reduce the size of GDP fluctuations. When an economy has a contractionary output gap, there will be higher unemployment rate and consequently, less income tax collections and more people living on welfare benefits. The government at its discretion has tools such as the discretionary fiscal policy and automatic stabilisers to stabilise the economy. Non-discretionary fiscal policy can alter the levels of taxations revenue and transfer payment expenses recorded during times of real GDP growth and contractions.
When the government decreases taxes, disposable income(Y-T) increases. That translates to higher demand (spending) and increased production (GDP). The fiscal policy also affects the supply side as income rate rates and structure of government payments can influence

You May Also Find These Documents Helpful

  • Satisfactory Essays

    Between 2007 and 2009 the U.S. economy experienced a severe recession. In an effort to stimulate the economy, the federal government passed a stimulus package. Explain the federal government’s use of fiscal policy (the stimulus) to promote growth and employment. Support your ideas with concepts found in the assigned reading. Include the following in your response:…

    • 541 Words
    • 3 Pages
    Satisfactory Essays
  • Satisfactory Essays

    macroeconomy is called fiscal policy. When government expenditures exceed net taxes, a budget deficit exists. When government expenditures are less than net taxes, a budget surplus exists.…

    • 128 Words
    • 1 Page
    Satisfactory Essays
  • Powerful Essays

    Fiscal policy is the use of presidential and governmental spending and taxation to change or even repair what is or might be wrong in the economy. The basic idea behind many of the fiscal policy ideas were introduced by British economist John Maynard Keynes during the Great Depression (Heakal, n.d.). When the government decides on the goods and services it will be purchasing, the payments it distributes, or even the taxes it collects, it is participating in fiscal policy. The economic influence of any change in the government budget can and in theory will benefit people such as a tax cut for families with children, can help raise their disposable income (Weil, n.d.).…

    • 1588 Words
    • 7 Pages
    Powerful Essays
  • Good Essays

    Econ 214 Problem Set 3

    • 694 Words
    • 3 Pages

    The fiscal policy in a particular country does make influence on the aggregate demand in the country. For example if the government increases the level of duties on…

    • 694 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    8. (10 points) Suppose that private sector spending is highly sensitive to a change in interest rate. Compare the effectiveness of monetary and fiscal policy in terms of rising and lowering real GDP…

    • 1995 Words
    • 8 Pages
    Powerful Essays
  • Good Essays

    It is clear that the federal government guides the overall pace of economic activity, attempting to maintain steady growth, high levels of employment, and price stability. The only way to accomplish this is by adjusting spending and tax rates or managing the money supply and controlling the use of credit, it can slow down or speed up the economy's rate of growth; this would in turn, affecting the level of prices and employment. Fiscal policy or taxation through expenditure to influence the economy becomes necessary. The government budget can only…

    • 590 Words
    • 3 Pages
    Good Essays
  • Good Essays

    First, we look at expansionary fiscal policy. The Federal government has at its discretion a number of tools available. An increase in government spending(G) and a decrease in taxes, ceteris paribus, will shift the demand curve rightward pushing the economy out of recession. With a decrease in taxes, an increase in disposable income(Yd) occurs, which in turn increases both consumers marginal propensity to consume and marginal propensity to save. An increase of MPC means more money is being spent in the economy increasing the demand for goods and services. An increase in consumption(C), investment(I), government spending(G), and net exports(Nx) will raise the overall level of economic activity, increasing aggregate demand and shifting the aggregate demand curve to the right. By shifting the aggregate demand curve to the right, we increase real output bringing the economy out of recession into full employment and equilibrium.…

    • 639 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    Keynesian Theory

    • 393 Words
    • 2 Pages

    Changes in government spending can affect the economy differently than changes from income taxes. This can be seen in the income effect and the purchasing power of individuals. When goods or services have decreases in prices, a previously set amount of…

    • 393 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Fiscal Policy

    • 627 Words
    • 1 Page

    A fiscal policy is the use of government expenditures and taxes to influence the level…

    • 627 Words
    • 1 Page
    Good Essays
  • Powerful Essays

    3. What are automatic fiscal stabilisers and what role do they play in the economic system? What factors influence these stabilisers?…

    • 554 Words
    • 3 Pages
    Powerful Essays
  • Better Essays

    Unit 38 M2 D2

    • 1547 Words
    • 4 Pages

    The fiscal policy is when the government changes its spending level and tax rates to monitor and influence their economy. The government will need to increase tax revenues to fund expenditure by increasing taxation by adjusting the income tax level.…

    • 1547 Words
    • 4 Pages
    Better Essays
  • Good Essays

    According to our text, automatic stabilizers are changes in fiscal policy that stimulate aggregate demand when the economy goes into recession without policymakers having to take any deliberate action. Automatic stabilizers come in the form of our tax system and government spending. As an individual’s income increases, they get put in a higher tax bracket. When the economy goes into a recession, the amount of taxes the government receives falls. The amount of taxes that the government receives is tied into economic activity so as earnings and incomes fall in a recession, the government’s revenue falls as well. In a recession,…

    • 416 Words
    • 2 Pages
    Good Essays
  • Good Essays

    Changes in federal taxes and purchases made by the government to achieve macroeconomic policy objectives are called fiscal policy (Hubbard and O’Brien, 2010).…

    • 652 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    Fiscal Policy

    • 332 Words
    • 2 Pages

    <br>Fiscal policy describes two governmental actions by the government. The first is taxation. By levying taxes the government receives revenue from the populace. Taxes come in many varieties and serve different specific purposes, but the key concept is that taxation is a transfer of assets from the people to the government. The second action is government spending. This may take the form of wages to government employees, social security benefits, smooth roads, or fancy weapons. When the government spends, it transfers assets from itself to the public. Since taxation and government spending represent reversed asset flows, we can think of them as opposite policies.…

    • 332 Words
    • 2 Pages
    Satisfactory Essays
  • Better Essays

    Expansionary fiscal policy consists of change in government expenditures, or taxes, in order in influence the level of economic activity, inflation, and economic growth (Amacher & Pate, 2012). Expansionary fiscal policy is when taxes are cut and government spending is increased. Lower taxes will increase disposable income. The increase in disposable income will lead to higher levels of consumer spending. In theory the more money that consumers spend, the higher the chance for economic growth. Tax cuts will also lead to an increase in aggregate demand. Aggregate demand is the total demand for goods and services is the economy. As stated earlier, a tax cut will increase people’s disposable income therefore increasing the amount of money available for consumption. The increase in consumption would increase the demand for goods and services. This in turn increases GDP (gross domestic product). GDP is the value of the total output that the economy produces in a given time period (Amacher & Pate, 2012). The higher the demand that there is for goods and services, the need for employees to produces these goods and services are needed. This increases employment. Lower tax cuts will also increase people’s incentive to work. With lower taxes comes more money to spend from their paychecks.…

    • 1540 Words
    • 7 Pages
    Better Essays