Question

You will be responsible for writing a paper (2 pages, double-spaced) regarding Fiscal Policy (government spending or income taxes). Please use a credible business/economic newspaper (Wall Street Journal, Business Week, the Economist) and analyze the article. What is the article about? Who are affected? Why does the Congress implement expansionary or contractionary fiscal policy? How does the article relate to our lecture on Aggregate Demand?

Answer 1

Fiscal policy is the government revenue collection and government spending impact on an economy. Fiscal policy can be expansionary fiscal policy or monetary fiscal policy.

Expansionary fiscal policy: During this policy Congress will cut tax rates and increase government spending in the economy. Hence the aggregate demand in the country increases which shifts the AD curve right. Due to tax cuts there will be more disposable income in the hands of the people which increase the spending of people which leads to increase in consumption.

Tax cuts will make the business to have more after tax profits in their thus leading them to invest more and expand the business. Employment rate in the country goes up as there will be more employment opportunities to people.

Government increase its spending in the country which will make huge development in infrastructure and people have more employment opportunities . All these lead to increase in AD and growth rate in the economy.

Contractionary fiscal policy: During this period Congress will try to reduce the AD in the country. There will be increase in taxes and decrease in government spending.

Tax increase will lead to decrease in consumption in the economy as people have less disposable income in their hands. Decrease in government spending reduce the development of infrastructure and Increase the unemployment rate in the country.

So the growth rate in the economy will decline and AD also reduce.

Expansionary fiscal policy is used during recession period or during the period where they want to increase the economy.

Contractionary fiscal policy is used when there is high inflation rate in the country.