Fiscal Policy

Fiscal Policy

Fiscal policy refers to the government's use of spending and tax policies to influence the economy. When the government increases its spending for defence purposes or raises personal income tax rates, it affects the total level of spending in the economy and, hence, will affect the overall macroeconomic activity of a nation measured by such factors as gross domestic product (GDP), employment, and inflation. This is true for almost any change in spending or taxes (Blanchard, pp. 1329-1368). Any change in government spending or taxes will also affect the government's budget deficit. An increase (decrease) in spending or a decrease (increase) in taxes will increase (decrease) the government's budget deficit for a given state of the rest of the economy. Because the government must borrow by selling U.S. Treasury securities to finance its deficits, any increase or decrease in the government's deficit will affect the market for loanable funds and interest rates, which then feeds back on GDP, employment, and inflation.

Background

The time earlier than the large depression globally there were different structures that were followed by the government which includes the political, technical and economical influences. Hence, in United States, the structure of the economy was free, in other words it was the “Free Economy” that was being followed. The major changes that happened after the Second World War, government had no other option but to determine the considerable options and play a positive role in order deploy the employment structures, the business life cycles and inflation that could affect the economy unconstructively (Blinder, pp. 115-126). Depending on the political attitudes and perspective of the people who were in power at that point of time, government is able to restructure and control the economical observable facts.

Federal Government Spending

It is the Federal Government spending and the procedure of tax spending by the authorities, fiscal policy is used in crucial circumstances for the performance and enhancement of the economy. It is the earnings by which a government regulates and set the level of spending to observe the manipulation of the financial systems of the country. It makes a proper combination with monetary policy to monitor a nation's money supply. As fiscal policy works to enhance and to balance the economy by its spending and tax bearing processes, it is important to know how it works, how it is examined and whether its implementation affects people or not (Carbaugh, p. 319-321).

Economists categorize government spending in two types. First, there are government purchases of goods and services. Government purchases of food, military goods, and other goods needed for consumption purchases, as well as purchases of investment goods, such as buildings and the building of bridges, are included. On the other hand, the government also spends on social insurance programs, such as Food Stamps and Medicare, which are primarily transfers of income from taxpayers to needy citizens. These are referred to as transfer payments. Federal, state, and local governments all purchase goods and services and have the potential to affect economic activity (Mankiw, ...