Fiscal policy involves the use of government spending, taxation and borrowing to influence both the pattern of economic activity and also the level and growth of aggregate demand, output and employment. The public intervention takes varies form from country to country and from time to time (Nellis & Parker, 2006). As a result, understanding the impact of fiscal policies on the market has become fundamental for a long-term company strategy. In order to define strategic goals and then measure and manage performance against goals managers need to comprehend the economy of which each firm forms a part. The economic and political environment are chancing faster than ever before. “Business success depends on managers anticipating and coping with change. To do this, managers must identify the characteristics of the environment in which they operate” (Nellis & Parker, 2006, p1).
The effect of government expenditures, taxation, and debt on the aggregate economy is of immense importance, and therefore great controversy in economics (Modigliani, 1987). Many factors influence aggregate demand besides monetary and fiscal policy. According to Keynesianism, desired spending by households and firms determines the overall demand for goods and services. When desired spending changes, aggregate demand shifts. If policymakers do not respond, such shifts in aggregate demand cause short-run fluctuations in output and employment. As a result, monetary and fiscal policymakers sometimes use the policy levers at their disposal to try to offset these shifts in aggregate demand and thereby stabilize the economy (Sloman, 2005). When policymakers change the money supply or the level of taxes, they shift the aggregate-demand curve by influencing the spending decisions of firms or households. By contrast, when the government alters its own purchases of goods and services, it shifts the aggregate-demand curve directly. Suppose, for instance, that the...
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