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Encyclopedia > Fiscal policy

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 and thought out 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 on the New York Stock Exchange trading floor. ... Public finance (government finance) is the field of economics that deals with budgeting the revenues and expenditures of a public sector entity, usually government. ... This article does not cite its references or sources. ... Monetary policy is the process by which the government, central bank, or monetary authority manages the money supply to achieve specific goals—such as constraining inflation or deflation, maintaining an exchange rate, achieving full employment or economic growth. ...


Fiscal policy is described as being either neutral, expansionary, or contractionary. An expansionary fiscal policy occurs when the government lowers taxes and increases spending; thus expanding output (national income). An increase in government spending or a cut in taxes shifts the aggregate demand curve to the right. An expansionary fiscal policy will expand the economy's growth. A contractionary fiscal policy occurs when the government raises taxes and lowers spending; thus lowering output (national income). A decrease in government purchases or an increase in taxes shifts the aggregate demand curve to the left. A contractionary fiscal policy will constrict the economy's growth. In economics, aggregate demand is the total demand for goods and services in the economy (Y) during a specific time period. ...

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. ... Economics offers various definitions for money, though it is now commonly defined as any good or token that functions as a medium of exchange that is socially and legally accepted in payment for goods and services and in settlement of debts. ... ...

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. A government bond is a bond issued by a national government denominated in the countrys own currency. ... Treasury Securities are bonds issued by the U.S. Treasury. ... Consols (short for consolidated annuities[]) are a form of 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 adjusting government spending and tax rates, are the best way to 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. The government can impliment these deficit-spending policies due to its size and prestige and stimulate trade. In theory, these deficits would be repaid for by an expanded economy during the boom that would follow, the basis for the New Deal. In economics, aggregate demand is the total demand for goods and services in the economy (Y) during a specific time period. ... The New Deal was the title President Franklin D. Roosevelt gave to the series of programs initiated between 1933–1938 with the goal of relief, recovery and reform of the United States economy during the Great Depression. ...


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 higher aggregate demand (AD) due to the lack of disposable income, contrary to the objective of a budget deficit. This concept is called crowding out. Alternatively, governments may increase government spending by funding major construction projects. This can also cause crowding out because of the lost opportunity for a private investor to undertake the same project. However, the effects of crowding out are usually not as large as the increase in GDP stemming from increased government spending. In economics, crowding out theoretically occurs when the government expands its borrowing to finance increased expenditure, or cuts taxes (i. ... In economics, crowding out theoretically occurs when the government expands its borrowing to finance increased expenditure, or cuts taxes (i. ...


Another problem is the time lag between the implementation of the policy, and visible effects seen in the economy. It is often contended that when an expansionary Fiscal policy is implemented, by way of decrease in taxes, or increased consumption (keeping taxes at old level), it leads to increase in aggregate demand; however, an unchecked spiral in aggregate demand will lead to inflation. Hence, checks need to be kept in place.


External links

  • US - External Debt viz Savings rate Comparing External debt viz Savings rate - since 1995 (which are two of the components that finances the Fiscal Policy )DIMITRI

  Results from FactBites:
 
Fiscal policy - Wikipedia, the free encyclopedia (497 words)
Fiscal policy is the economic term which describes the actions of a government in setting the level of public expenditure and how that expenditure is funded.
Contractionary fiscal policy - a decrease in government purchases of goods and services, an increase in net taxes, or some combination of the two for the purpose of decreasing aggregate demand and thus controlling inflation.
Governments often use their fiscal policy to try to influence the economy towards economic objectives such as low inflation and unemployment.
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