Fiscal Policy And Fiscal Policies

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China’s economy has been declining and economy analysts expect the world’s second largest economy to further decline. The council has commented regarding the economic situation that China “needs more active fiscal policy” (CNBC) in order to have its economy back on the reasonable range. Fiscal policy affects aggregate demand depending on the government’s spending and taxation. Thus, if the government decides to make changes in its taxation such as discounting corporate taxes, the aggregate demand curve will shift. In addition to that, money spent on public services and welfares will increase government spending which will affect aggregate demand as well.
Economic Analysis
Fiscal Policy
“Fiscal policy is the changes in federal
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The article regarding China’s economy relates to discretionary fiscal policy specifically associated with expansionary policy. Expansionary policy is where “governments use spending and taxing powers to promote stable and sustainable growth” (Horton and El-Ganainy). Hence, China’s cabinet has planned to increase the government’s spending where “more money will be spent on public services to improve livelihoods and steady the economy” (CNBC).
Aggregate Demand and Aggregate Supply
Aggregate demand (AD) shows the “relationship between the price level and the quantity of real GDP demanded”. Whereas aggregate supply (AS) shows the “relationship between the price level and the quantity of real GDP supplied in the short run” (Hubbard and O 'Brien, 2015). Fiscal policy relates with the AD/AS model where different fiscal policies will cause the aggregate demand curve to shift differently. The ability of expansionary policy with the increase of the government’s spending is that it could increase aggregate demand and prevent it from having a negative shift. China’s cabinet has decided that it will increase its expense on public services and infrastructure constructions. Therefore, the policy that will be carry out is expansionary where based on Diagram 1, aggregate demand will increase with its curve shifting to the right from AD1 to AD2 due to increase in government spending. As a result, the will cause the market to have a
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