Fiscal Policy

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  • Fiscal policy
    • Economic growth
      • When the economy is healthy, the government generally uses restraint with its fiscal policy. When the economy is not healthy, the government tends to exercise a stimulus approach.
      • Balance of payments
        • A policy of fiscal restraint is typically exercised when a country's economy is operating at full capacity. In other words, the economy is apparently healthy, employment is near capacity and inflation begins to set in as a result.
        • The government may respond to rising inflation by increasing taxes or reducing spending. While a number of other factors determine the balance of payments, a fiscal policy of restraint will generally cause both the government and consumers to slow its spending
      • A general decrease in overall spending can cause the cash flow leaving the country to decrease as consumers and the government both purchase less. This will decrease the debit side of the balance of payments.
    • Balance of payments
      • A policy of fiscal restraint is typically exercised when a country's economy is operating at full capacity. In other words, the economy is apparently healthy, employment is near capacity and inflation begins to set in as a result.
      • The government may respond to rising inflation by increasing taxes or reducing spending. While a number of other factors determine the balance of payments, a fiscal policy of restraint will generally cause both the government and consumers to slow its spending
    • It is...
      • Fiscal policy involves the use of government spending, taxation and borrowing to affect the level and growth of aggregate demand, output and jobs
      • It is also a means by which a redistribution of income & wealth can be achieved
      • Fiscal policy is also used to change the pattern of spending on goods and services
      • It is an instrument of intervention to correct for free-market failures
    • Inflation
      • If you increase AD, it could cause inflation. In a recession, when there is spare capacity inflation is unlikely to be a problem. However, if AD increases too much, when the economy is close to full capacity then it will cause inflation.
      • The fiscal policy has the power to affect the level of overall demand in the economy. The primary objective of fiscal policy is to maintain the price stability, economic growth and employment of the country. Hence an appropriate fiscal policy can help in combating rising inflation rates.
      • Inflation is best handled through monetary inflation.
    • Unemployment
      • Creating jobs through government programs that hire people in local communities  or providing loans or grants to entrepreneurs to start new businesses or expand existing ones. Think of fiscal policy as "direct intervention" in the economy to create jobs.
      • To answer the specific question, fiscal policy can be a very effective tool to fight unemployment and that is exactly what it is intended to do

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