Fiscal Policy

Topics: Monetary policy, Public finance, Keynesian economics Pages: 2 (560 words) Published: September 17, 2013
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 analyze these effects, economist began by showing how taxes and government spending affect the economy’s flow of income. Then we can see how changes in spending and tax policy affect aggregate demand.

Fiscal policies can be approached in a variety of ways and they tend to vary as head of state change because different people have their own approaches to economic issues. Nations must strike a balance with their fiscal policies, so that they benefit the economy without being perceived as too interfering.

Many economist caution against an extremely active stabilization policy, arguing that a government that tries too hard to stabilize the economy, through either fiscal or monetary policy can end up making the economy less stable.

The expansionary fiscal policies also decrease net exports, which have a mitigating effect on national output and income. When government borrowing increases interest rates it attracts foreign capital from foreign investors. This is because, all other things being equal, the bonds issued from a country executing expansionary fiscal policy now offer a higher rate of return.

Federal Reserve chairman Ben Bernake and European Central Bank President Jean –Claude Trichet, who united to fight the worst global recession in seven decades, may be diverging over the outlook for their economies Attitudes on the economy have shifted sharply in just a few months. In May the European fiscal crisis forced Trichet (European Central Bank President) to buy...

References: Heakel, Reem. “What is Fiscal Policy”
February 16, 2009 Heakel. Review date 5 October 2012 .
Weil, David N. “Fiscal Policy”
September 18, 2008 Weil. Review date 6 October 2012.
Sooran, Chand “Fiscal Policy”
April 17 2010 Sooran. Review date 6 October 2012.
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