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Encyclopedia > Fiscal issues

Fiscal policy is the economic term that defines the set of principles and decisions of a government in setting the level of public expenditure and how that expenditure is funded. Fiscal Policy and Monetary Policy are the macroeconomic tools that governments have at their disposal to manage the economy. Fiscal Policy is the deliberate change in government spending, government borrowing or taxes to stimulate or slow down the economy. It contrasts with monetary policy, which describes the policies about the supply of money to the economy. Face-to-face trading interactions among on the New York Stock Exchange trading floor Economics, as a social science, studies the production, distribution, and consumption of resources. ... Public finance (government finance) is the field of economics that deals with budgeting the revenues and expenditures of a public sector entity, usually government. ... Macroeconomics is the economics sub-field of study that considers aggregate behavior, and the study of the sum of individual economic decisions. ... Monetary policy is the government or central bank process of managing money supply to achieve specific goals—such as constraining inflation, maintaining an exchange rate, achieving full employment or economic growth. ...

Contents

Methods of raising funds

Governments spend money on a wide variety of things, from the military and police to services like education and healthcare, as well as transfer payments such as welfare benefits. Government spending consists of government purchases, including transfer payments, which can be financed by seigniorage (the creation of money for government funding), taxes, or government borrowing. ... In political science and economics, a transfer payment is a payment of money from a government or any other organization to an individual, a group or another order of government for which no good or service is directly required in return. ...


This expenditure can be funded in a number of different ways: Revenue is a U.S. business term for the amount of money that a company earns from its activities in a given period, mostly from sales of products and/or services to customers. ...

Seigniorage, also spelled seignorage, is the net revenue derived from the issuing of currency. ... An example of Money. ... ...

Funding of deficits

A fiscal deficit is often funded by issuing bonds, like Treasury bills or consols. These pay interest, either for a fixed period or indefinitely. If the interest and capital repayments are too great, a nation may default on its debts, most usually to foreign debtors. Look up bond in Wiktionary, the free dictionary. ... Treasury Securities are bonds issued by the U.S. Treasury. ... Consols is a British government bond (gilt), dating originally from the 18th century. ... Default is the name of a number of quite different concepts. ...


Economic effects of fiscal policy

Fiscal Policy is used by governments to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives of price stability, full employment and economic growth.


Keynesian economics suggests that a government running a Budget Deficit or a lower surplus compared to the previous financial year, will stimulate aggregate demand. This can be used in times of recession or low economic activity as an essential tool in providing the framework for strong economic growth and working toward full employment. In economics, aggregate demand is the total demand for goods and services in the economy (Y) during a specific time period. ...


During periods of high economic growth, a budget surplus can be used to decrease activity in the economy. A Budget surplus will be implemented in the economy if inflation is high, in order to achieve the objective of price stability. The removal of funds from the economy will, by Keynesian Theory, reduce levels of aggregate demand in the economy and contract it, bringing about price stability.


Despite the importance of fiscal policy, a paradox exists. In the case of a government running a budget deficit, funds will need to come from public borrowing (the issue of government bonds), overseas borrowing or the printing of new money. When governments fund a deficit with the release of government bonds, an increase in interest rates across the market can occur. This is because government borrowing creates higher demand for credit in the financial markets, causing a lower aggregate demand (AD) due to the lack of disposable income, contrary to the objective of Budget Deficit. This concept is called crowding out. In economics, crowding out theoretically occurs when the government expands its borrowing more to finance increased expenditure or tax cuts in excess of revenue (i. ...


See also

Historically, the United States government has tended to spend more than it takes in, with national debt that was close to $1,000,000,000 at the beginning of the 20th century. ... Monetary policy pertains to the regulation, availability, and cost of credit, while fiscal policy deals with government expenditures, taxes, and debt. ...

External links

  • Smartalec Economics Discussion Board: [1] - Growing community for Economics discussion.

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