Question

1) What is fiscal policy?

2) How does fiscal policy affect the economy?

3) Which one of the five smart fiscal policy keys would be best to boost our GDP?

Answer 1

1. Fiscal policy is the process by which a government changes its levels of expenditure and tax rates to control and influence the economy of a country. It is the sister monetary policy tool, in which a central bank controls the money supply of a country. Those two policies are used in different combinations to guide the economic goals of a country.

2. Both fiscal and monetary policies can affect aggregate demand as they can influence the variables used to measure it: consumer expenditure on goods and services, investment on business capital goods, government spending on public goods and services, exports and imports. Often this is the cause of multiple trilemmas. Fiscal policy affects aggregate demand by altering government spending and taxation. Such factors influence employment and household income, which then impact the spending and investment of consumers.

3. Government has the power to tax, thereby giving it greater control over its revenue. Federal, state, and local governments will mandate higher taxes and increase their revenue. Households and businesses have the harder task of selling their labor, goods, and services to raise income.
By increasing or reducing taxes, the government is affecting the level of disposable income (after-tax income) of households. A tax increase will decrease disposable income, because households take money. A tax cut would increase the disposable income, as it gives more resources to households. The key factor driving market demand is disposable income, which accounts for two-thirds of the total demand