Fiscal Policy

Fiscal Policy

Introduction

Fiscal Policy

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.

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. 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.

Discussion

Types of Fiscal Policy

It has two types expansionary and contractionary, both helps government in designing the structure the ability to putt tariff and taxes. The ruling authority can use both of them together or they can use one of it with respect to the requirement of the stable or unstable economy's measures.

Expansionary Fiscal Policy

The expansionary policy is used in reducing the taxes and increase the spending of the government, the main motive of this policy is to increase and realize the cumulative demand of the goods and services that are consumed or used by the people and that are influential for the overall economy. Fiscal policy is generally used when the economy is facing recession; it helps in reducing the unemployment rate and to increase the overall output. In recession it also facilitates the government to fight against the depression. For example, if the Defense Department orders additional parts and equipment from a defense contractor, those purchases raise production and employment at the contractor. The firm's employees increase their spending on consumer goods, illustrating the multiplier effect resulting from a fiscal expansion (Gregory Mankiw, 2010).

Contractionary Fiscal Policy

This is used when the legislator reduce the spending of the government and increase the taxes, government can possibly endorse the discretional measures to deliberately lower the economic growth that helps in avoiding inflation. The government might endorse the philosophical reasoning in order to reduce the size of overall capacity and stops the expansion, by monitoring the budget discrepancy in order to avoid inflation, in these circumstances government slow done its collection and consider the spending rather to enhance the ...