Top-Rated Free Essay

fiscal policy

Satisfactory Essays
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.investopedia.com/terms/f/fiscalpolicy.asp Fiscal Policy and Economic Stabilization
In the 1930s, with the United States reeling from the Great Depression, the government began to use fiscal policy not just to support itself or pursue social policies but to promote overall economic growth and stability as well. Policy-makers were influenced by John Maynard Keynes, an English economist who argued in The General Theory of Employment, Interest, and Money (1936) that the rampant joblessness of his time resulted from inadequate demandfor goods and services. According to Keynes, people did not have enough income to buy everything the economy could produce, so prices fell and companies lost money or went bankrupt. Without government intervention, Keynes said, this could become a vicious cycle. As more companies went bankrupt, he argued, more people would lose their jobs, making income fall further and leading yet more companies to fail in a frightening downward spiral. Keynes argued that government could halt the decline by increasing spending on its own or by cutting taxes. Either way, incomes would rise, people would spend more, and the economy could start growing again. If the government had to run up a deficit to achieve this purpose, so be it, Keynes said. In his view, the alternative -- deepening economic decline -- would be worse.
Keynes's ideas were only partially accepted during the 1930s, but the huge boom in military spending during World War II seemed to confirm his theories. As government spending surged, people's incomes rose, factories again operated at full capacity, and the hardships of the Depression faded into memory. After the war, the economy continued to be fueled by pent-up demand from families who had deferred buying homes and starting families. http://economics.about.com/od/monetaryandfiscalpolicy/a/stabilization.htm

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 Policy

    • 2035 Words
    • 9 Pages

    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…

    • 2035 Words
    • 9 Pages
    Powerful 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
  • 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