Valeria Femat

Jordan Schuerger

Fiscal Policy

Government spending policies that influence macroeconomic conditions. These policies affect tax rates, interest rates and government spending, in an effort to control the economy.

Since the 1980s, most western countries have held a "tight" policy, limiting public expenditure.

It is the sister strategy to monetary policy with which a central bank influences a nation's money supply. These two policies are used in various combinations in an effort to direct a country's economic goals.

The Government can raise the level of its own spending. This "fiscal pump-priming" directly increases aggregate demand and can have a multiplier effect on equilibrium national income.

The government could raise current expenditure (for example raising pay levels in education and the health service) or expand spending on capital projects which add to the stock of capital. Sustained economic growth provides a platform for more jobs to be created in the economy.

A reduction in direct taxation increases consumers' disposable income and should boost household spending. The effect may be greater if taxes are cut for people on lower than average incomes. These tax-payers are likely to spend a greater percentage of their disposable income

Government reducing Unemployment

Structural Unemployment

The control of inflation has become one of the dominant objectives of government economic policy in many countries.

Effective policies to control inflation need to focus on the underlying causes of inflation in the economy. For example if the main cause is excess demand for goods and services, then government policy should look to reduce the level of aggregate demand.

If cost-push inflation is the root cause, production costs need to be controlled for the problem to be reduced.

Government reducing Inflation

Inflation

One of the most commonly discussed issues in economics is how tax rates relate to economic growth.

Advocates of tax cuts claim that a reduction in the tax rate will lead to increased economic growth and prosperity.

Others claim that if we reduce taxes, almost all of the benefits will go to the rich, as those are the ones who pay the most taxes.

How Taxes effect Economy

Economy

“Investopedia US.” Investopedia . Value Click. 2013. Library. 10 May. 2013 <http://www.investopedia.com/articles/04/051904.asp>

Works Cited