Question

Examine the fiscal policies in place at the start of your specific time period of 2000-2010 in relation to their effects on macroeconomic issues. For instance, consider level of government spending, taxation, subsidies, unemployment benefits, and so on.   

Analyze new fiscal policy actions undertaken by the U.S. government throughout the time period during 2000-2010 by describing their intended effects, using macroeconomic principles to explain the actions.  

Explain the impact of the new fiscal policy actions on individuals and businesses within the economy by integrating the macroeconomic data and principles.

Answer 1

Fiscal policy is what the government employs to influence and balance the economy, using taxes and spending to accomplish this. Fiscal policy tries to nudge the economy in different ways through either expansionary or contractionary policy, which try to either increase economic growth through taxes and spending or slow economic growth to cutback inflation, respectively. Basically, fiscal policy intercedes in the business cycle by counteracting issues in an attempt to establish a healthier economy, and uses two tools - taxes and spending - to accomplish this. Since the beginning of 2000s, however, the role of fiscal and monetary policy has started to become more active. Fiscal deficits and public debt levels in EMEs as a whole have declined substantially. Domestic financing has increased, and the share of foreign currency debt has fallen dramatically. And the average public debt maturity has lengthened significantly.Macroeconomic conditions have created a tension between foreign capital inflows and domestic factors, like high domestic growth. Specifically, capital inflows are quickly increasing the foreign capital share in bank funding sources, enabling small and medium-sized banks to scale their credit supply, and posing important issues about the stability of the financial system. Besides the medium-term concerns about capital inflows, the rapid expansion of credit in Brazil also has significant effects on inflation today. Indeed, excess credit supply has driven lending rates down and lengthened the maturities of credit contracts, despite the lack of reasonable improvements in borrowers’ profiles. In other words, current credit expansion generated by large capital inflows has boosted aggregate demand and amplified pressures on inflation.

Fiscal policy in developing countries is especially important in terms of macroeconomic management. Despite this importance, fiscal policy in developing economies has been mainly discussed through the tax collection and “simple” accounting side. Therefore the coming chapters will cover this issue in a broader perspective.As a measure for the public sector, the concept of “General government” instead of “central government” will be preferred. For developing countries a broad measure should be preferred since in developing countries several public entities might play an active fiscal role. Also a broad measure is necessary to capture the overall impact of fiscal variables on macroeconomic performance. it will provide with a strategic framework that aims at reducing poverty in developing countries. Some key sectors such as education, health, environment and public finance have been identified as vectors for sustained development in least developed countries. To reach the MDG‟s objectives fiscal policy plays an essential role. Indeed better knowledge of fiscal policies mechanisms will enhance public spending efficiency and sound budgetary policies will avoid returning two or three decades backward if debt is kept at sustainable levels.macroeconomic and fiscal model that will provide with forecast of revenues and expenditures

Fiscal policy promotes growth through macro and structural tax and expenditure policies. At the macro level, it plays an important role in ensuring macroeconomic stability, which is a prerequisite for achieving and maintaining economic growth. At the micro level, through well-designed tax and spending policies, it can boost employment, investment, and productivity. Notably

• Lowering the tax wedge and improving the design of labor taxes and social benefits can strengthen work incentives and induce a positive labor supply response;
• Reforming capital income taxes to tax rents reduces distortions and encourages private investment; well-targeted tax incentives can stimulate private investment and enhance productivity through research and development (R&D);
• Efficient public investment, especially in infrastructure, can raise the economy’s productive capacity;
• More equitable access to education and health care contributes to human capital accumulation, a key factor for growth;
• If growth-friendly reforms require fiscal space, revenue measures should focus on broadening the tax base and minimizing distortions; and expenditure measures should aim at rationalizing spending and improving efficiency.

Unemployment benefits play a key role in advanced economies in protecting individuals from loss of income due to transitory or structural unemployment. However, these programs, if not well designed, can adversely affect employment incentives and outcomes (Meyer, 2002; Abbring and others, 2005; OECD, 2006). The withdrawal of benefits as individuals return to employment can operate like a tax on earned income and create work disincentives, especially for low-wage workers and families with children.

Question 2; Answer

The government can use fiscal stimulus to spur economic activity by increasing government spending, decreasing tax revenue, or a combination of the two. Increasing government spending tends to encourage economic activity either directly through purchasing additional goods and services from the private sector or indirectly by transferring funds to individuals who may then spend that money. Decreasing tax revenue tends to encourage economic activity indirectly by increasing individuals’ disposable income, which tends to lead to those individuals consuming more goods and services. This sort of expansionary fiscal policy can be beneficial when the economy is in recession, as it lessens the negative impacts of a recession, such as elevated unemployment and stagnant wages. However, expansionary fiscal policy can result in rising interest rates, growing trade deficits, and accelerating inflation, particularly if applied during healthy economic expansions. These side effects from expansionary fiscal policy tend to partly offset its stimulative effects.The government can use contractionary fiscal policy to slow economic activity by decreasing government spending, increasing tax revenue, or a combination of the two. Decreasing government spending tends to slow economic activity as the government purchases fewer goods and services from the private sector. Increasing tax revenue tends to slow economic activity by decreasing individuals’ disposable income, likely causing them to decrease spending on goods and services. As the economy exits a recession and begins to grow at a healthy pace, policymakers may choose to reduce fiscal stimulus to avoid some of the negative consequences of expansionary fiscal policy, such as rising interest rates, growing trade deficits, and accelerating inflation, or to manage the level of public debt.

The aggregate demand in the economy falls, which generally results in slower wage growth, decreased employment, lower business revenue, and lower business investment. Recessions occur for a number of reasons, but as seen during the most recent recession from 2007 to 2009, they can result in serious negative consequences for both individuals and businesses. However, the government can replace some of the lost aggregate demand and limit the negative impacts of a recession on individuals and businesses with the use of fiscal stimulus by increasing government spending, decreasing tax revenue, or a combination of the two. Government spending takes the form of both purchases of goods and services by the government, which directly increase economic activity, and transfers to individuals, which indirectly increase economic activity as individuals spend those funds. Decreased tax revenue via tax cuts indirectly increases aggregate demand in the economy. For example, an individual income tax cut increases the amount of disposable income available to individuals, enabling them to purchase more goods and services. Standard economic theory suggests that in the short term, fiscal stimulus can lessen the negative impacts of a recession or hasten a recovery. However, the ability of fiscal stimulus to boost aggregate demand may be limited due to its interaction with other economic processes, including interest rates and investment, exchange rates and the trade balance, and the rate of inflation

The basic Macroeconomics Principles are

• National Income – The area of macroeconomics analyses the wealth a nation generates. There are different measures for this such as Gross National Product, Gross Domestic Product, and Net National Income. The underlying purpose of all of these is to paint a picture of the financial health of a nation. The basic approach to this undertaking is looking at the value of goods and services produced by a nation over the course of a year.

• Inflation – Inflation is the study of how the cost of goods and services rises as time goes on. For example, if a car cost $1000 more in a given year than it did ten years previously, that would be a case of inflation. Inflation is a complex area of economics but the consensus among leading modern economists is that it’s desirable for inflation to be kept at a low or steady rate as near to zero as possible. This helps negate the negative consequences of economic recession.

• Economic Output – This is the study of the goods and services which a national economy produces. A high output is desirable as the more money that is spent on a nation’s goods and services, the more benefit this holds for a country due to the fact that more people will be in employment and greater tax revenue will be raised.

• International Trade – This area of macroeconomics looks at the trade that occurs between nations in terms of goods, services, and raw materials. International trade often forms a large part of a nation’s income as the world is obviously a far larger market place than a single nation. International trade is vital to the world economy as often certain raw materials or goods are only or best produced in a certain country or region. For example, colder nations do not have the climate needed to produce bananas, so for that country to have banana availability, international trade is required.