Monetary Policy And Fiscal Policy

1178 Words5 Pages
The United States is best described as a mixed economy. A mixed economy is when the government is not in charge of the economy, but is still majorly involved in economic decisions. The government plays a critical role in providing economic conditions where the marketplace can function effectively. Any decisions made are in order to either maintain the market or stabilize the economy during a financial crisis. Monetary policy and fiscal policy are two tools by which government uses to guide the economy. Sometimes the economy is challenged with both inflation and unemployment at high rates. Macroeconomics breaks down the entire economy and the issues affecting it, including inflation, unemployment, economic growth, and monetary and fiscal…show more content…
Expansionary fiscal policy is when taxes are cut and government spending is increased. Lower taxes will increase disposable income for consumers. The increase in disposable income will lead to a higher level of consumer spending. In theory the more money that consumers spend, the higher the possibility for economic growth. Tax cuts will also lead to an increase in aggregate demand, which is the total demand for goods and services in the economy. Expansionary fiscal policy involves the government attempts to increase aggregate demand. This would involve higher government spending and/or lower taxes. In theory, higher government spending will increase aggregate demand and will lead to higher economic growth. Lower taxes should increase the income of consumers, which would lead to consumer spending to rise. The expansionary fiscal policy will also lead to an increase in the amount in the government’s budget deficit. This would be a potential problem of expansionary fiscal policy since higher borrowing could push up interest rates on government debt and cause markets to fear default. The impact that the expansionary fiscal policy would have depends on many factors. In theory, this lower tax should boost the spending, but that is not always the case. One of the major issues for this policy is the state of the
Open Document