Fiscal Policy Essay

2023 Words Apr 27th, 2008 9 Pages

The economy fluctuations in today’s world have become one of the most important factors in determining the direction of an economy growth. Non-stable economy can harm and slow the development and growing rate of a nation. There are many tools to stabilize the economy and reduce the frequency and the altitude of economic fluctuations. Among these tools are the fiscal policy and monetary policy. This report discusses the fiscal policy and why the governments use this too to stabilize the economy and encounter the economic fluctuations.

Fiscal policy is a macroeconomic tool used by the government through the control of taxation and government spending in an effort to affect the business cycle and to achieve
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That is, there are factors that increase or decrease the efficacy of fiscal policy. These factors are called multipliers. In particular, there are two types of multipliers. There are tax multipliers and government spending multipliers.
Tax multipliers are based on the population's willingness to consume. The marginal propensity to consume, or MPC, is a measure of that willingness. It is defined as the amount of an additional dollar of income that a consumer will spend on goods and services. The MPC can have a value between zero and one. A small MPC represents a large amount of savings and a small amount of consumption. A large MPC represents a small amount of savings and a large amount of consumption. When a tax decrease occurs, consumers will spend part of the money and save part of it. Therefore, the actual change in national income as a result of a change in tax policy is
∆Y= (±∆T ×(-MPC))/(1-MPC) .................(3)
The resulting number is called the tax multiplier.
There is also a multiplier for government spending. This multiplier is derived in a different way. When the government increases purchases, it directly increases output, or national income. However, there is a greater effect than just the actual amount of increase in government purchases. When the government

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