What is fiscal policy? Fiscal policy is the means by which a government adjusts its levels of spending in order to monitor and influence a nation’s economy. It is the sister strategy to monetary policy with which a central bank influences a nation’s money supply. In this essay, we take look at how fiscal policy works, how it must be monitored and how its implementation may affect different people in an economy. (“What Is Fiscal Policy”, 2014)
When the economy begins to suffer from serious recession or inflation, politicians will almost intervene to try to improve the situation. Their interventions may or may not be good economics – often they are not. – But you can hardly blame the politicians for trying. Nobody wants to go down in history like Herbert Hoover, the president who became a widely hated figure for failing to use the government aggressively enough to try and end the Great Depression. Politicians were hoping to improve economic conditions with two main tools at their disposal. Fortunately for them, the basic principles behind them are pretty simple. The core thinking is that inflation and recession are opposites of one another but during the periods of recessions, there is not enough money circulating in the economy. During the periods of inflation, there is too much money which is the answer to these problems which is to either put money in or take money of the economy.
Helping and maintaining fixed exchange rates and policy independence, the central bank must ensure that the international quantities are supplied and that demand are equal to the existing exchange rate. The ability to conduct expansionary monetary and fiscal policies are limited if there is a country with fixed exchange rates, because many other countries official reserves are limited as well. At this point, economists began to disagree over who should do the putting in or the taking out, and which means should be used to do so. Some favor the fiscal policy-adjusting taxes and government spending, but most prefer monetary policy-adjusting interest rates and reserve requirements, and buying or selling bonds. Fiscal policy is set by the president and Congress; they created the tax system and they also decide how the government should spend the money each year. The basic premises behind much of contemporary fiscal policy were introduced by British economist John Maynard Keynes during the Great Depression.
Keynes argued, contrary to conventional thinking, that they market and the economy could not regulate itself. During periods of recession, consumers hold on to their money rather than spend it. Businesses were afraid to expand operations and hire more workers. Therefore, the government needed to jump-start the economy by injecting some money into it. The tools for doing so were tax rates and government spending. By lowering taxes, people had money to spend; they could buy cars and appliances, or convert their garage into a gaming room.
This put people to work which stimulated even more spending and job growth. Some of the major challenges that many policymakers face, is how much the government should be involved within the economy. Throughout the years, there have been many degrees of government interference, but it has been accepted to help sustain the economy. The economy demands that the government stay involved so we do not go into another Great Depression and will help the population grow.
What is fiscal policy? (2014). Retrieved from
Colander, D. C. (2013). Economics (9th ed.). Retrieved from https://newclassroom3.phoenix.edu/Classroom/#/contextid/OSIRIS:44486377/context/co/view/activityDetails/activity/430adad2-27c6-42e2-9b96-7aec82ea6765/expanded/False.