Macroeconomics: The Fiscal Policy

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1. Fiscal policy is defined as "the use of government spending and taxation to influence the economy" (Weil, 2008). All government spending influences the economy in some way, but the amount of spending and where that spending is directed will have different types of effects on the health of the economy. The same can also be said for taxation who is taxed and how creates incentives that guide the course of the economy. By contrast, monetary policy is "the actions undertaken by a central bank"¦to influence the availability and cost of money and credit to help promote national economic goals" (FOMC, 2012). Thus, the objective of monetary policy is to provide the means for economic activity to take place, and guide the level of economic activity in the country, whereas fiscal policy relates to specific spending choices on the part of government. 2. Keynes pointed about that fiscal policy can be used to stabilize an economy. The basic idea is that because government spending contributes to the economy, changing the level of government spending can have an effect on the health of the economy. Hayek argued that government will inherently be less efficient with respect to economic planning and resource distribution. Note that this is not a direct refutation of Keynes, because Keynes does not argue that government is the best at resource allocation, only that government intervention is sometimes beneficial during difficult economic periods. Keynes is, if nothing else, less
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