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Fiscal Policy, Refers to a decrease in government expenditure and/or an…

- - - - Decrease taxes
        
        Drawbacks
        
        Additionally, a reduction in taxes can affect the wages of employees in government-funded programs (Police, Firefighters, Public-School teacher etc.). Or where that is not the case and the government attempts to pay regular wages, they could increase their federal debt.
        
        A reduction in taxes correlates to a reduction in government revenue as taxation is one of the forms of government earnings. A decrease in government revenue, implies higher costs, and therefore could relate to a lack of public goods (necessities)
        
        Benefits
        
        By reducing taxes, it reduces the production costs for firms, allowing them to increase production and preventing them from laying off workers. Additionally, some firms may even decide to take on new workers in order to increase their productive capacity with the goal of profit-maximizing
        
        Decreasing taxation is commonly perceived as favourable in the public eye as it benefits consumers and producers. Thus, if the governing body decided to decrease taxes, this would be beneficial for their campaign and could help them during elections.
        
        Consumer's have more disposable income and by reducing taxes, it reduces the price of goods/services, increasing purchasing power as well. As a result, consumption can increase leading to an increase in real GDP
      - Increase government spending
        
        Drawbacks
        
        If governments need to increase their borrowing in order to increase their spending, it can lead to an increase in interest rates, thereby causing an increase in exchange rates. As a result, this would most likely make exports less attractive and imports more attractive, causing a fall in (X-M) resulting in a fall in real GDP.
        
        If the government aims to increase spending through increased borrowing, it can cause the crowding out effect, where the government monopolizes the available funds in the economy. As a result, firms may not have enough access to sufficent funding for investment thus causing a decrease in investment (and real GDP).
        
        In some cases, in order to increase spending in the economy, the government may have to run a budget deficit
        
        Benefits
        
        In the case that the spending is focused on increasing education and skills, it can increase the productive capacity of the economy, thus helping achieve economic growth.
        
        Increased government spending can relate to an increase in investment for the improvement of a nation (roads, electricity, access to water, sanitation). which can improve standards of living for inhabitants.
        
        By increasing spending, it reduces production costs for firms, allowing them to increase production for a lower price. Thus, consumers face an increase in purchasing power and are able to increase consumption, thus increasing real GDP.
    - - Structural
        
        Occurs as a result of changing structure of an economy (changes in technology, consumer tastes, etc.). Permanent fall in AD --> long term unemployment due to lack of occupational mobility
      - Frictional
        
        Short term unemployment that occurs when people are in between jobs or have left education and are waiting to get their first job
      - Cyclical
        
        Associated with downturns in the business cycle. As AD falls, firms cut down production --> fall in demand for factors of production (labor)
      - Seasonal
        
        Jobs that are related to seasons and thus causes unemployment during the off-seasons
  - - - Decrease Government Spending
        
        Drawbacks
        
        As a result of decrease in spending, the public may resent the governing body and thus this could impact their results during elections
        
        Decreasing government spending can increase costs of production for firms, causing a fall in profits. Or in the case that firms decide to increase their selling prices to accomodate the change in costs of production, it would increase costs for consumers resulting in a fall in AD at the cost of increased unemployment and a fall in real GDP
        
        Decreasing government spending can cause a fall in the quality of public services such as water, electricity, and sanitation, resulting in a fall in living standards.
        
        Benefits
        
        Decreasing spending also implies a lower need for borrowing money. This can help keep interest rates more stable(low) and thus the exchange rates as well. As a result, exports become more attractive and imports would become less attractive, increasing economic productivity and real GDP.
        
        Also, due to a lesser need for borrowing money (for increased spending), there are more available funds in the economy that firms can utilize to increase investment. This can relate to an increase in Real GDP.
        
        By decreasing government spending, governing bodies decrease the risks of unsustainable federal debt. Thus, this increases the governments ability to respond to problems and emergencies through effective means.
      - Increase taxes
        
        Drawbacks:
        
        Political Pressure: increasing taxes is an unpopular decision because it reduces purchasing power. Thus, in hopes to receive votes, political parties may be influenced
        
        Time lag: varying tax rates is a democratic process and it takes time time for consumers to adjust their spending
        
        With taxation, it is difficult to achieve specific targets/predict a precise outcome because varying taxes can have implications on various aspects of an economy. Thus, by increasing taxes and reducing AD, it can create unintentional consequences such as an increase in unemployment and a fall in real GDP
        
        Benefits
        
        By increasing taxes, it reduces the disposable income for consumers and increases the prices of goods/services. As a result, taxes limit consumption causing a fall in AD and thus reducing inflationary pressures.
        
        As taxation is a means of government earnings, an increase in taxes contributes to higher government revenue. Thus, this revenue can be used to improve other areas of society such as education and healthcare
    - - Cost-push Inflation: occurs as a result of an increase in costs of production (prices of factors of production)
      - Demand-pull Inflation: occurs as a result of increasing aggregate demand (due to a change in the determinants of AD) in the economy