Fiscal Policy

Powerful Essays
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

You May Also Find These Documents Helpful

  • Good Essays

    Fiscal Policy

    • 560 Words
    • 3 Pages

    Fiscal Policy Lets begin with the obvious, Fiscal Policy is when modern government spend a great deal of money and collect a lot in taxes. The government of the United Sates plays a smaller role in the economy than those of Canada or most European countries. Those roles are still sizable, meaning that the government plays a major role in the U.S. economy. Changes in the federal budget changes in government spending or in tax policy can potentially have large effect on the American economy. To…

    • 560 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    fiscal policy

    • 1144 Words
    • 5 Pages

    a national level, where Government has achieved its objective of starting the process of putting Australia back on the path of a sustainable budget. This should give business the confidence it needs to invest and innovate. But the function of fiscal policy is reduced for current Australian economy, because the world economies are more integrated than before, so the government should take another direction to recover the economy of Australian. Such as import and Export. (Words…

    • 1144 Words
    • 5 Pages
    Powerful Essays
  • Good Essays

    Fiscal Policy

    • 1198 Words
    • 5 Pages

    PURPOSE The purpose of the assignment is to enhance learners’ understanding of how fiscal policy can be used to achieve economic goals. REQUIREMENT Discuss and evaluate how fiscal policy tools can assist in improving economic growth, employment and mitigate inflation. Answer Fiscal policy is a policy concerned with Government Revenues and Government Expenditures. The tools are government expenditures (G), taxes (T), both direct and indirect, deficit financing, i.e., government…

    • 1198 Words
    • 5 Pages
    Good Essays
  • Good Essays

    Fiscal Policy

    • 1209 Words
    • 5 Pages

    In economics, fiscal policy is the use of government expenditure and revenue collection (taxation) to influence the economy.[1] Fiscal policy can be contrasted with the other main type of macroeconomic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the money supply. The two main instruments of fiscal policy are government expenditure and taxation. Changes in the level and composition of taxation and government spending can impact on the following…

    • 1209 Words
    • 5 Pages
    Good Essays
  • Powerful Essays

    Fiscal Policys

    • 2474 Words
    • 10 Pages

    Supplemental Unit 5: Fiscal Policy and Budget Deficits Fiscal and monetary policies are the two major tools available to policy makers to alter total demand, output, and employment. This feature will focus on fiscal policy, what it is and its potential and limitations as a tool with which to promote economic stability and strong growth. What is Fiscal Policy? When the supply of money is economic constant, government expenditures must be financed by either taxes or borrowing. Fiscal policy involves the…

    • 2474 Words
    • 10 Pages
    Powerful Essays
  • Good Essays

    Fiscal Policy

    • 627 Words
    • 1 Page

    Ewan Morgan Mr.Wright Economics January 28,2015 1. Can fiscal policy changes be instituted in a manner that will reduce economic fluctuations? Explain. A fiscal policy is the use of government expenditures and taxes to influence the level of economic activity. Fiscal Policies can be used in an effort to close a recessionary or an inflationary gap reduce the economic fluctuations. During a recession , government should increase spending in order to increase the demand for goods and lower taxes in order for…

    • 627 Words
    • 1 Page
    Good Essays
  • Better Essays

    FISCAL POLICY

    • 1576 Words
    • 7 Pages

    Fiscal Policy as an Economic Stabilization Measure Fiscal Policy refers to the various decisions undertaken by the government regarding public expenditures and revenue. Fiscal Policy is a direct government intervention in the economic processes of an economy. All the sub fiscal policies can be broadly categorized as being either ‘Public Expenditure’ or ‘Public Revenue’. The fiscal policy’s sub-policies are: The Taxation structure – through this fiscal tool the government is able…

    • 1576 Words
    • 7 Pages
    Better Essays
  • Good Essays

    Fiscal Policy

    • 483 Words
    • 2 Pages

    Fiscal Policy Assignment The traditional Keynesian approach to fiscal policy differs in three ways from that is presented in the Fiscal Policy Chapter in your textbook. 1. It emphasizes the underpinnings of the components of aggregate demand. 2. It assumes that government expenditures are not substitutes for private expenditures and that current taxes are the taxes taken into account by consumers and firms. 3. The traditional Keynesain approach focuses on the short run and so…

    • 483 Words
    • 2 Pages
    Good Essays
  • Satisfactory Essays

    fiscal policy

    • 359 Words
    • 2 Pages

    Definition of 'Fiscal Policy' Government spending policies that influence macroeconomic conditions. Through fiscal policy, regulators attempt to improve unemployment rates, control inflation, stabilize business cycles and influence interest rates in an effort to control the economy. Fiscal policy is largely based on the ideas of British economist John Maynard Keynes (1883–1946), who believed governments could change economic performance by adjusting tax rates and government spending. http://www…

    • 359 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Fiscal Policy

    • 884 Words
    • 4 Pages

    Topic 4 – Fiscal Policy Refers to the governments choices regarding the overall level of government purchases or taxes Government spending – on health sector, education, infrastructure, defence. Taxation policy – income tax, sales tax (VAT), corporate tax, capital gains tax. Fiscal policy and aggregate demand Government spending – increase in G spending → AD shifting right e.g. Gov places £10 billion order for new school buildings → building contractor has increased demand for output…

    • 884 Words
    • 4 Pages
    Good Essays