Fiscal Policy In Economics
In economics, there are many policies that can be applied in order to make a change in a country’s economy. In this particular essay, we are going to talk about fiscal policy, which is a policy that uses government purchases of goods and services, taxes, and government transfers in order to create an impact to the economy. The fiscal policy allows you to use two different policy types, the expansionary fiscal policy, and the contractionary fiscal policy. The Expansionary fiscal policy uses the fiscal policy tools to create an increase on the aggregate demand, by making an increase to government spending (G), a decrease on taxes (T), and increasing government transfers (Tr). As we know, GDP = Y = C+ I+ G+ X- M, if consumption, …show more content…
Also, discretionary fiscal policy, which are actions by policy makers to mitigate the effects of a business cycle. As we know, the government never knows when the economy is not running at its potential level. It takes time to make changes, because of the approval needed from the congress. A policy lag is the time required to approve a given policy. In order for us to see the results we have to wait for the expenditure lag; which is the time required for AD to respond to fiscal policy. The average duration of this changes takes from 1 to 5 years.
Kennedy’s tax policies of 1960.
On 1960’s president Kennedy used the discretionary fiscal policy to bring the economy back and out of the recession. Here is the stimulus package that Kennedy implemented. Depreciation reform, investment tax credit, corporate rate reductions, Individual tax cuts, business tax …show more content…
In times of economic recession the strategy is to increase the money supply by buying securities. They will also lower interest rates to promote economic growth. With low-interest rates, it is easier to borrow money and should promote economic expansion. In time of an economic boom, the fed will increase interest rates to control borrowing and growth. They will also decrease the money supply as much as possible by buying up securities to stabilize M1 (Currency in hands of nonbank public + Travelers checks + checking account deposits). These policies are put into place to limit growth and stabilize prices in the economy.
The Central Bank controls supply of money (M0). MO equals, currency + Bank reserves + Banks vault cash. M0 combines with the demand for federal funds and sets the federal funds rate in the economy. Now, let 's take a look at what determines the demand for money. The demand for money depends on the amount of money each individual and businesses are willing to hold, which goes hand in hand with the opportunity cost, being the interest foregone by holding