Please enable JavaScript.
Coggle requires JavaScript to display documents.
Fiscal Policy - Coggle Diagram
Fiscal Policy
Aims
-
External balance
-
Causes: the government could increase income tax. This would reduce consumer discretionary income and reduce spending on imports. The advantage of fiscal policy is that it would not have an adverse effect on the exchange rate. Higher income tax would also improve government finances.
Low and stable inflation
Causes: Governments can use wage and price controls to fight inflation, but that can cause recession and job losses.
-
Economic growth
Causes: If a government wants to stimulate growth in the economy, it will increase spending for goods and services. This will increase demand for goods and services. Since demand goes up, production must go up.
-
Business cycle
-
Causes: The business cycle is caused by the forces of supply and demand—the movement of the gross domestic product GDP—the availability of capital, and expectations about the future.
Expansionary
What is it? Expansionary fiscal policy is a form of Keynesian Demand management. They employ a range of fiscal measures to achieve their goals. It decreases AS to increase AD.
If a government would like to increase consumption, then it can lower income taxes to increase disposable income, increasing AD
If a government would like to increase investments it can lower corporate taxes so that firms enjoy high after-tax profits to spend, increasing AD
Government have major investment projects themselves and may increase spending in order to improve public services.
-
-
-
Contractionary
What is it? Contractionary fiscal policy refers to a decrease in government expenditures and/or an increase in taxes that aim at decreasing aggregate and thus reducing inflationary pressure. Increases AS to decrease AD.
-
RWE: In the United States, the most recent large-scale use of contractionary fiscal policy came during President Bill Clinton's time in office (1993–2001), when he increased taxes on high-income taxpayers and decreased government spending on both defense and welfare.
Impact on Stakeholders
-
Producers gain less total income due to the decrease in demand as a result of the decrease in purchasing power.
-
Politicians could be seen as unfavorable if they employ contractionary fiscal policy since it directly inconveniences consumers.
What is it? A fiscal policy is defined as tax cuts, transfer payments, rebates and increased government spending on projects such as infrastructure improvements
How effective is it?
-
Limitations
Time Lags. Changing fiscal policy takes time, tax rates cannot be changed quickly and will need to be processed. Once a change is made, it will likely take time for the AD to pick up
Political Pressure. Government spending and taxation are often influenced by political factors. For example, deflationary fiscal policies may be needed, but they may be blocked by political parties who do not want to raise taxes for fears of losing votes.
Sustainable debt. Governments may have to run budget deficits in order to find expansionary fiscal policies. This may accumulate to unsustainable national debt in the long-run.
Effect on exports. Expansionary fiscal policy may lead to an increase in interest rates. This may lead to an increase in the exchange rate, making exports less attractive.
Crowding out effect If governments attempt to increase spending by increasing borrowing, they will monopolize available funds. This means that other firms will not have access to funds for investments, so investment will fall. However, the fall in investment has chance to be offset by the increase in government spending.
Inability to achieve targets It is virtually impossible to finely adjust fiscal policies to target specific goods. It is possible to get the economy moving; however, it is hard to predict where it will end
