Essay on The Fiscal Policy And Fiscal Policies

1272 Words Dec 16th, 2015 null Page
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, investment, and government purchases increase, then the total GDP will increase. If these variables were to decrease then GDP will decrease. The fiscal policy uses the multiplier effect to increase real GDP in the economy. The Contractionary fiscal policy uses the fiscal policy tools to decrease aggregate demand, by decreasing government spending (G), increasing taxes (T), and decreasing government transfers. Contractionary policy leads to a fall in real GDP bigger than the aggregate spending effects caused by the policy.

There are different ways the government can use fiscal policy tools, first by changing government spending. This change will reflect an increase on government spending (G), being caused by an increase on consumption…

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