Fiscal Policy And Fiscal Policies

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Macroeconomic objectives vary widely, from reversing a recession to containing inflation, achieving full employment to increasing economic output. Fiscal policy is one of the tools often used to realise these goals and create financial stability. There are two ways in which fiscal policy can be implemented, either a contractionary fiscal policy, or an expansionary fiscal policy, which I will explore in this assignment.

The aim of an expansionary fiscal policy is to raise expenditure, whereby economic output and household income will also increase. This is done by altering the flow of government expenditure and tax, namely increasing government expenditure and decreasing tax.

Increasing government expenditure triggers a series of …show more content…

Thus, the original government expenditure boost launches a cycle of incremental economic output and household income.

The second part of expansionary fiscal policy, which may be used in conjunction with increasing government expenditure or alone, is decreasing taxes. By lowering taxes people have to pay, such as income tax, workers keep more of their money and therefore have more disposable income, which allows them to increase consumption. As a consequence, spending goes up and firms resort employing more people to increase production to a level that satisfies the higher demand. Once again, the effects of the multiplier can be seen as increased economic output launches a cycle where people have even more disposable income, and spending rises further still.

In essence, expansionary fiscal policy can be used to raise income, stimulate spending and increase levels of production in a given economy, be it open or closed. Gradually, as unemployment falls, this sequence allows the economy to move towards full employment.

As with most theories, expansionary fiscal policy does indeed have its criticisms and downfalls. If a given household’s expenditure were to be higher than the household’s income, it would spell financial trouble unless the extra spending can be funded somehow. Similarly, at a time of expansionary fiscal policy, a government is spending more on goods and services, whilst tax

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