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The goal of expansionary fiscal policy is how to#

Fiscal policy is used to influence the aggregate demand in a country, whereas monetary policy is used to control the amount of money available throughout the economy. monetary policyĪs mentioned earlier, the United States relies on two types of policy to shape the economy: fiscal policy and monetary policy. government decided it needed to play a larger role in determining the direction of the economy. government took a very hands-off approach when it came to setting economic policy. Prior to the Great Depression in the 1920s, the U.S. The key is finding the right balance and making sure the economy doesn't lean too far either way. Whoever receives those dollars will have extra money to spend – and, as with taxes, the government hopes that money will be spent on other goods and services. Spending is used as a tool for fiscal policy to drive government money to certain sectors needing an economic boost. A cut in taxes provides families with extra money, which the government hopes will, in turn, be spent on goods and services, thus spurring the economy as a whole. For example, if the government is trying to spur spending among consumers, it can decrease taxes. Taxes influence the economy by determining how much money the government has to spend in certain areas and how much money individuals should spend. The two main tools of fiscal policy are taxes and spending.

Individual taxes: Taxes on individuals, such as income tax, affects their personal income and how much they can spend, injecting more money back into the economy.įiscal policy typically needs to be changed when an economy is running low on aggregate demand and unemployment levels are high.

Government spending: Aggregate demand is increased by the government's own spending.

Lowering taxes increases aggregate demand and business investment spending.

Business tax policy: Taxes that businesses pay to the government affects profits and the amount of investment.

The aggregate demand curve dictates that at lower price levels, more goods and services are demanded, while there is less demand at higher price points.įiscal policy affects these measurements, with the goal to increase GDP and aggregate demand in a sustainable manner. Another factor is aggregate demand, which is the sum of goods and services produced by a nation purchased at a certain price point. The success of the economy is commonly measured by a few factors including GDP. The change in GDP depends on which of these situations applies. However, in a low-employment economy, this demand will lead to more employment and production but not necessarily price variation. If this demand increase occurs in a high-employment economy, prices will vary. To see how fiscal policy can affect the economy, consider a fiscal expansion that leads to rising demand, which, in turn, increases production.

The goal of expansionary fiscal policy is how to#

Learn how to calculate cost of goods sold for your business. This figure details the value of goods and services produced by a nation within a year. Fiscal policy is often used in combination with monetary policy, which, in the United States, is set by the Federal Reserve to influence the direction of the economy and meet economic goals.įiscal policy is paramount to successful economic management since taxes, spending, inflation and employment all factor into gross domestic product (GDP). Fiscal policy definedįiscal policy is based on the theories of British economist John Maynard Keynes, which hold that increasing or decreasing revenue (taxes) and expenditures (spending) levels influence inflation, employment, and the flow of money through the economic system. Both the executive and legislative branches of the government determine fiscal policy and use it to influence the economy by adjusting revenue and spending levels. Fiscal policy is a crucial part of American economics.