Fiscal Policy Assignment

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The Fiscal policy essentially encompasses government expenditure policies that affect macroeconomic circumstances. Using fiscal policy, policymakers attempt at

  • lowering unemployment rates
  • regulating inflation
  • bringing stability in business cycles and
  • affecting interest rates

so that the economy is under control. It’s widely known that governments can influence, regulate and affect the performance of an economy through the adjustment of tax rates and government expenditure.
During the economic recession, tax rates could be reduced by the government so that the economy gets a boost and is on the growth path. If taxes paid are relatively less, then that is an indication that there is money either to spend or invest. With an increase in spending or investment by the consumer, there is an improvement in growth of the economy. Economic policymakers would not appreciate if there is an unbridled increase in spending as that could lead to an increase in inflation.
It could very well be that the government deciding on increasing its own expenditure by building quite a few highways for example. The notion is that any additional government expenditure would result in the creation of jobs and a decline in the rate of unemployment. There are economists who do not accept the notion that jobs can be created by governments since governments obtain funds through the levy of tax on the private sector who produce.
The downside of fiscal policy is that specific groups are affected disproportionately. A decrease in taxes might not benefit taxpayers at any income level, as some taxpayers may be benefited with a substantial decrease in comparison with others. Similarly, when the expenditure of the government increases, the group of taxpayers who would be at the receiving end of government expenditure would derive the most benefit.
Construction workers, for example, are the beneficiaries of expenditure on the highway. Fiscal policy plays a significant and a vital role indeed in terms of performance of the economy. Policymakers use fiscal policy to stimulate a sluggish economy, make it strong and bring stability to the economy.
The rudimentary notion, however, is balancing among changes in tax rates and public spending. Inflation would rise if there is stagnation in the economy and to revive the economy government spending increases or taxes are decreased. The reason is, as the amount of money increases with a subsequent increase in demand, it could lead to devaluation of the currency. What this translates to is, more spending to purchase a product, the value of which hasn’t changed at all.
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