Expansionary Policy

1254 Words Nov 29th, 2013 6 Pages
Expansionary Fiscal and Monetary Policies
Macroeconomics: ECO 203
Professor Charles Aki
September 1, 2013

The US economy has seen some detrimental changes over the past decade. These changes resulted in unsubstantial unemployment rates, fluctuating interest rates, unstable GDP, and an increase in taxes. The federal government has an obligation to citizens to respond to the changes in the economy that affect each household. Expansionary Fiscal and Monetary Policies are economic policies used by the government to level out the extreme swings in our economy. The development state of US economy has forced the Federal Government to implement changes using their authority in Expansionary Fiscal and Monetary Policies in order to stabilize
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So when the government decides what goods and services they want to purchase; what payments it wants to distribute; what taxes it’s going to collect or cut, then they are engaging in fiscal policy. Fiscal policy directly affects the budget and the deficit. Expansionary fiscal policy is when spending is higher than the revenue or the budget is in deficit. Expansionary fiscal policy raises the aggregate demand when the government increases purchases and keeps taxes constant and when they cut taxes and increase transfer payments giving households larger disposable incomes. Bottom line, these actions increase consumption therefore raising aggregate demand. (Turnovsky, 2004) Capital, labor, and technology determine a natural rate of output, about which fiscal policies can cause temporary fluctuations in the economy.
When there is a downturn in the US economy both government spending and the US deficit automatically increase, because the demands on safety-net provisions and falling tax revenues. Fiscal policy is used for managing the economy it affects the total Gross Domestic Product (GDP). Expansionary fiscal policies should raise the demand for goods and services, leading to an increase in output and prices. So when the economy is in a