Question

Identify the two main ways government can impact the economy through its fiscal policy and briefly describe how this is accomplished.

Answer 1

A crucial part of American economics is fiscal policy. Both the government's executive and legislative branches establish fiscal policy and use it by changing revenue and expenditure rates to control the economy. Economic success is generally calculated by a few variables, including gross domestic product (GDP), which is the cost of a nation's goods and services within a year. Another aspect is aggregate demand, which is the amount of goods and services produced at a price point by a nation that has been purchased. The aggregate demand curve indicates that more goods and services are available at lower price rates, while at higher price points there is less demand.

Usually, fiscal policy needs to be changed when an economy runs low on aggregate demand and high levels of unemployment. Taxes and spending are the two main tools of fiscal policy. Through deciding how much money the government needs to spend in certain areas and how much money people can spend, taxes affect the economy. Of example, if the government tries to stimulate consumer spending, it can lower taxes. A tax cut provides extra funds for households, which the government hopes will be spent on goods and services in effect, thereby stimulating the economy as a whole. Spending is used as a fiscal policy tool to drive government money to some sectors that need an economic boost. Whoever receives these dollars will have extra money to spend – and the government hopes, as with taxes, to spend money on other goods and services.

The effects of an economy's fiscal policy, whether in the form of spending or taxation, are directly seen by businesses. Businesses can see potential for investment from both government spending and private investment. It usually happens during an expansionary strategy when more money flows from government and other sources into the economy as taxation is small as well. When a price-to-demand balance is met, businesses can expect to grow and thrive.