Essay on Six Debates over Macroeconomic Policy

This policy is results in faster results to speed up the economy for the short term. Fiscal Policy is later used to develop a plan of yearly actions and is a long term way to stabilize the economy. The next idea to stabilize the economy is a theory called monetarism which is the belief that if government did not interfere with the market economy that employment would be high and inflation low. Followers believe the government is the reason of downturns such as the recent recession.

A fiscal deficit is when a government's total expenditures exceed the tax revenues that it generates. A budget deficit can be cut by either reducing public expenditure or raising taxes. In this essay, I am going to analyse the benefits and costs of increasing tax rates to reduce fiscal deficits instead of cutting government expenditure.

15. If for a country, the quantity of its currency demanded exceeds the quantity supplied, then there is a

Taxation, the amount of money we pay every year and of course the government is a big spender has a lot of assets at its disposal to influence the economy. The government is a very large entity and controls a lot of money. Fiscal policy is more effective when trying to stimulate the economic growth rather than trying to slow down an economy that is overheating. The goal of fiscal policy is too accomplished by decreasing aggregate expenditures and aggregate demand through a decrease in government spending. Fiscal policy pros are; it can build up the operation electronic stabilizers. Well-timed fiscal stabilization together with automatic stabilizers can have an impact on the level of aggregate expenditure and activity in the economy. Fiscal policy can be picky by attempting specific category of the economy. For example, the government can be focused to concentrate education, housing, health or any specific industry area. Fiscal policy controls a spending tap. Fiscal policy can have a forceful effect if used in bankruptcy, because the government can open a spending tap to increase the level of aggregate

A decrease in tax rates might be enacted to stimulate consumer spending. If households receive the tax cut but expect it to be reversed in the near future, they may hesitate to increase their spending. Believing that tax rates will rise again (and possibly concerned that they will rise to rates higher than before the tax cut), households may instead save their additional after-tax income in anticipation of needing to pay taxes in the future.

Fiscal Policy can be explained in many ways, for example. Fiscal policy is the use of the government budget to affect an economy. When the government decides on the taxes that it collects, the transfer payments it gives out, or the goods and services that it purchases, it is engaging in fiscal policy. The primary economic impact of any change in the government budget is felt by particular groups—a tax cut for families with children, for example, raises the disposable income of such families. Discussions of fiscal policy, however, usually focus on the effect of changes in the government budget on the overall economy—on such macroeconomic variables as GNP and unemployment and inflation.

The United States is the leading economy across the globe and experienced several tribulations in the recent past following the 2008 global recession. Despite these recent challenges, there are expectations among policymakers and financial experts that the country will experience solid economic growth. Actually, financial analysts have stated that the U.S. economy will be characterized by increased consumer spending, increased investments by businesses, reduced rate of unemployment, and reduction in government cut. Some analysts have also stated that the country’s economy will strengthen in 2014 with an average of 2.7 percent or more. However, these predictions can only be understood through an analysis of the current macroeconomic

Fiscal policies, if used efficiently, can be extremely effective and helpful to the economy. However, many pros and cons are tied to this method. Firstly, fiscal policies can be effective because they can focus spending to precise purposes.1 Therefore, the money that the government spends can be used on the things that would benefit the economy the most. Additionally, the government can reduce negative externalities with the use of taxes.1 An example of this would be taxing things that have a negative impact on the environment, such as companies producing an immense amount of pollution.1 Additionally, the government can also tax companies that are using too much of a limited resource.1 By doing this, the government not only can use the money gained from taxing to help the economy, but they would be reducing externalities such as these in order to help the country. Lastly, the effects of a fiscal period are much more immediate and quicker in comparison to a monetary policy,1 This means that the recessionary

The primary tactics utilized by the stimulus plan relied heavily on expansionary fiscal policy through the use of increased government expenditures as seen in Table 2 ("The Impact of the Recovery Act on Economic Growth"). Tax cuts were also instituted to stimulate economic growth (“Why Did Obama Extend the Bush Tax Cuts in 2010?,” n.d.). According to Keynesian economists, increased government spending would increase consumer confidence and spending which would provide for a reduction in unemployment rates through increases in job creation (John Maynard Keynes). Additionally, increases to disposable income would be seen through the use of targeted tax cuts and would ultimately result in an increase in consumption (Arnold, 2001). This can be seen in Chart 1 as an increase in disposable income that occurs concurrently with a rise in consumer spending.

During times of economic recession or uncertainty, the government can enact expansionary fiscal policy to either combat a decline in economic function, or in times of extreme and potentially harmful economic growth, they can instead enact contractionary fiscal policy to reduce economic expansion. Expansionary fiscal policy is used to effect the economy in periods of recession or economic decline, through decreasing the tax rates imposed on tax sources, and by also increasing government spending on constructive programs and outlays. As a portion of expansionary fiscal policy, decreasing tax rates allows the constituents of the economy to increase their profits and revenue as a smaller portion of their income would be paid into taxes. An increased profitability of businesses and increased income for workers results in greater discretionary consumer and business spending creating a higher demand for normal goods and services along with increased per capita production due to greater profitability of said goods, which is economic growth. Economic recession can also be fought through expansionary fiscal policy by increasing government spending of taxed funds on government outlays. When the government uses taxed funds to increase government spending more goods and

Therefore, a rise in government spending helps the economy and a cut in spending will hurt the economy, or even push the economy to a state of recession. Certainly, conservative perception holds that every dollar the government adds to demand or minus from it, will be multiplied by ancillary changes in private spending. A rise in spending of the government might induce the private sector to contract a phenomenon called crowding out. Conversely, a cut in the government spending may release an economic resource the private sector could put to work more productively.

Aggregate spending refers to consumer purchases, business and housing investment, government purchases of goods and services and exports net of imports . This is the second way to add up GDP. The Federal Reserve uses monetary policy to stimulate aggregate demand by expanding money supply and lowering interest rates, which increases households and firms’ desired spending. Expansionary fiscal policy uses changes in taxes and government spending to affect overall spending.

Expansionary Fiscal Policy is utilized when the economy is experiencing a recession. In order to keep the economic sustained, the government would increase governmental spending and, also lower taxes, and with these occurrences it will increase the demand which can raise the gross domestic product. The occurring combination of governmental spending and tax reductions could increase the demand as well as, spending within the economy.

     With America in recovery from the attacks on our freedom and our economy, many wonder if we will return to phase one (expansion) and how long it will take to reach phase two (recession) again. The Keynesian Theorists of America believe that the government should actively pursue Monetary policies (enacted by the Federal Reserve Bank) and Fiscal policies (enacted by Congress) to reach adjustments to price, employment, and growth levels. In our full market economy, we must use these economic policies to control aggregate demand. When these policies are used to stimulate the economy during a recession, it is said that the government is pursuing expansionary economic policies.

“The aggregate expenditures line is the summation of consumption expenditures, investment expenditures, government purchases, and net exports. The 45-degree line represents all combinations in which aggregate expenditures equal aggregate output. Keynesian equilibrium is also represented by the saving investment, or injection-leakage, model as the intersection between the injection line (investment expenditures, government purchases, and exports) and the leakage line (saving, taxes, and imports).”(2)