Please enable JavaScript.
Coggle requires JavaScript to display documents.
Fiscal Policy, Screen Shot 2022-04-17 at 2.46.43 PM, Screen Shot 2022-04…
Fiscal Policy
A demand-side government’s policy using changes in government spending and/or taxation rates
AIMS
Promote a stable economic environment for long-term growth
Causes of low economic growth:
Rise in unemployment
High inflation
Low AD
Fixes:
Implementing expansionary and contractionary fiscal policies
Benefits:
Reduces unemployment
Reduces inflation
Increases AD
Improves public services and infrastructure
Higher incomes
Drawbacks:
Demand-pull inflation
Income inequaity
Recession after inflation
Negative externalities
RWE:
https://economictimes.indiatimes.com/news/economy/indicators/ukraine-war-to-result-in-1-3-per-cent-lower-gdp-growth-for-india-says-world-bank-official/articleshow/90826406.cms
To reduce business cycle fluctuations
Causes of business cycle fluctuations:
Changes in interest rates
Levels of employment
Consumer expectations
Changes in AD and AS
Fixes:
Implementing expansionary and contractionary fiscal policies
Benefits:
Can pull an economy out of a deep recession
Stable levels of employment
Drawbacks:
Can lead to a fall in net exports and investment due to an increase in government expenditure
Opportunity cost
RWE:
https://timesofindia.indiatimes.com/business/international-business/germany-in-2023-recession-if-russian-gas-stopped-economic-institutes/articleshow/90817891.cms
Maintain a low and stable rate of inflation
Cause of high inflation:
Excess AD
Fixes:
Implementing a contractionary fiscal policy
Benefits:
Slows and reduces inflation
Drawbacks:
Increased unemployment
Reduces economic growth since there is reduced supply of money
Slowing down of production due to reduced money supply
RWE:
https://edition.cnn.com/2022/04/13/economy/uk-inflation-march/index.html
To achieve an external balance between export revenue and import expenditure
Causes:
Exchange rates
High inflation
Low AD
Fixes:
Implementing expansionary and contractionary fiscal policies
Benefits:
Expansion
Economic growth
Reduced unemployment
Drawbacks:
If spending increases without an increase in revenues, the government has to borrow; this is called deficit spending. This causes a fall in investment.
Opportunity cost
RWE:
https://www.investmentmonitor.ai/special-focus/ukraine-crisis/ukraine-russia-conflict-impact-trade
Maintain a low unemployment rate
Causes of high unemployment rate:
High inflation
Decreased AD
Fixes:
Implementing an expansionary fiscal policy
Benefits:
Reduces unemployment
Increases economic growth
Drawbacks:
Increase in interest rates
Fall in investment
opportunity cost when increasing spending and cutting taxes
RWE:
https://www.reuters.com/world/africa/south-africas-unemployment-rate-hits-new-record-high-q4-2021-2022-03-29/
To promote equitable distribution of income
Causes of unequal distribution of income:
Unemployment
Taxes
Inflation
Recession
Fixes:
Implementing expansionary and contractionary fiscal policies
Benefits:
Decrease unemployment
Decrease inflation
Decrease taxes
Drawbacks:
Low economic growth
Political inequality
Poverty
Unemployment
RWE:
https://www.theguardian.com/us-news/2022/apr/13/wealthiest-americans-tax-income-propublica-investigation
Expansionary Fiscal Policy
Refers to an increase in government expenditures and/or a decrease in taxes that aim at increasing aggregate demand and thus real output and employment.
RWE:
https://www.cnbc.com/2020/03/25/coronavirus-stimulus-bill-updates-whats-in-the-2-trillion-relief-plan.html
by:
Lowering INCOME taxes to increase disposable income causing AD to increase
Lowering CORPORATE taxes so that firms enjoy higher after-tax profits to encourage greater investment, causing AD to increase
Increase spending to improve or increase public service to increase AD
Contractionary Fiscal Policy
Refers to a decrease in government expenditures and/or an increase in taxes that aim at decreasing aggregate demand and thus reducing inflationary pressures.
RWE:
https://www.euractiv.com/section/economy-jobs/news/euro-zone-ready-to-reverse-planned-fiscal-policy-tightening-amid-ukraine-war/
by:
Decreasing government spending
Increasing personal income taxes. As personal income taxes increase, after-tax income falls, causing consumption spending and aggregate demand to fall.
Increasing business taxes. As taxes on profits increase, after-tax profits fall, leading businesses to spend less on investment and causing aggregate demand to fall.
A combination of decreasing spending and increasing taxes.
