FISCAL POLICY WHAT IS FISCAL POLICY FISCAL POLICY

FISCAL POLICY

WHAT IS FISCAL POLICY? • FISCAL POLICY REFERS TO THE USE OF THE FEDERAL BUDGET—TAXING, SPENDING AND BORROWING—CAN BE USED TO INFLUENCE THE ECONOMY (I. E. CHANGE THE LEVEL OF TOTAL SPENDING IN THE ECONOMY) • FISCAL POLICY IS SHAPED MOSTLY BY CONGRESS AND THE PRESIDENT • FISCAL POLICY IS INFLUENCED BY POLITICAL IDEOLOGY AND VIEW OF THE APPROPRIATE SCOPE OF GOVERNMENT

GOVERNMENT TAXATION • FUNDS RAISED THROUGH TAXING AND BORROWING TO PAY FOR GOVERNMENT EXPENDITURES. • THE AMOUNT OF GOVERNMENT TAXATION DEPENDS ON A NUMBER OF FACTORS INCLUDING • POLITICAL IDEOLOGY • THE POLITICAL CLIMATE • THE STATE OF THE ECONOMY

GOVERNMENT SPENDING • GOODS AND SERVICES PROVIDED BY GOVERNMENT AND PAID FOR BY TAXING AND BORROWING. • FEDERAL GOVERNMENT EXPENDITURES INCLUDE NATIONAL DEFENSE AND A SYSTEM OF JUSTICE. • STATE AND LOCAL GOVERNMENT EXPENDITURES INCLUDE POLICE, ROADS AND PUBLIC EDUCATION. • THE AMOUNT OF GOVERNMENT SPENDING DEPENDS ON A NUMBER OF FACTORS INCLUDING POLITICAL IDEOLOGY, THE STATE OF THE ECONOMY AND THE POLITICAL CLIMATE.

USES OF FISCAL POLICY • IN THE SHORT TERM, FISCAL POLICY CAN BE USED TO REDUCE THE EXTREMES OF RECESSION AND INFLATION. • IF THE ECONOMY IS IN RECESSION, THEN AN EXPANSIONARY FISCAL POLICY CAN INCREASE AGGREGATE DEMAND THROUGH SOME COMBINATION OF TAX CUTS AND/OR SPENDING INCREASES. • IF AN ECONOMY IS SUFFERING INFLATION, THEN A CONTRACTIONARY FISCAL POLICY CAN REDUCE AGGREGATE DEMAND THROUGH SOME COMBINATION OF TAX INCREASES AND/OR SPENDING CUTS.