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Fiscal Policy Macroeconomics Fiscal Policy In order to learn and understand fiscal policy or monetary policy it is important to whether an economy, no matter where it may be in the world, can self regulate, or whether it needs an outside influence in order to adjust. This is where Classical and Keynesian economics will come into play.
If you are of the Keynesian school of thought, you believe that the economy needs your influence in order to correct itself.
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This correction can be in the form of fiscal policy. This type of policy is used when policy-makers believe the economy needs outside help in order to adjust to a desired point.
Typically a government has a desire to maintain steady prices, an employment level, and a growing economy. If any of these areas are out of sorts, some type of fiscal policy may be in order. Fiscal policy can be used in order to either stimulate a sluggish economy or to slow down an economy that is growing at a rate that is getting out of control which can lead to inflation or asset bubbles.
Fiscal policy directly affects the aggregate demand of an economy. Recall that aggregate demand is the total number of final goods and services in an economy, which include consumption, investment, government spending, and net exports.
There are two types of fiscal policy: Expansionary Fiscal Policy When an economy is in a recession, expansionary fiscal policy is in order. In order to close this gap, a government will typically increase their spending which will directly increase the aggregate demand curve since government spending creates demand for goods and services.
At the same time, the government may choose to cut taxes, which will indirectly affect the aggregate demand curve by allowing for consumers to have more money at their disposal to consume and invest. The actions of this expansionary fiscal policy would result in a shift of the aggregate demand curve to the right, which would result closing the recessionary gap and helping an economy grow.
Contractionary Fiscal Policy Contractionary fiscal policy is essentially the opposite of expansionary fiscal policy.
When an economy is in a state where growth is at a rate that is getting out of control causing inflation and asset bubblescontractionary fiscal policy can be used to rein it in to a more sustainable level.
If an economy is growing too fast or for example, if unemployment is too low, an inflationary gap will form. In order to eliminate this inflationary gap a government may reduce government spending and increase taxes.
A decrease in spending by the government will directly decrease aggregate demand curve by reducing government demand for goods and services. Increases in tax levels will also slow growth, as consumers will have less money to consume and invest, thereby indirectly reducing the aggregate demand curve.
By changing the levels of spending and taxation, a government can directly or indirectly affect the aggregate demand, which is the total amount of goods and services in an economy.Dear Twitpic Community - thank you for all the wonderful photos you have taken over the years.
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Macroeconomics, Finance and Money: Essays in Honour of Philip Arestis: Economics Books @ rutadeltambor.com Macroeconomics (from the Greek prefix makro-meaning "large" + economics) is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole.
This includes regional, national, and global economies.
Macroeconomists study aggregated indicators such as GDP, unemployment rates, national income, price indices, and the interrelations among the.