Question

Describe the roles of government bodies that determine fiscal policy. Explain fiscal policies’ effects on the economy’s production and employment. How does the enormous U.S. national debt affect the federal government’s fiscal policy? Is the current U.S. national debt a serious problem like a heavy personal debt? Why or why not? Discuss thoroughly.

Answer 1

Fiscal policy is a critical part of US economics. Either the government's executive and legislative branches evaluate monetary policy and use it to change revenue and spending rates to affect the economy. Typically, 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 principal instruments of fiscal policy. By deciding how much money the government will invest on some fields and how much money people can spend, taxes affect the economy. For example, if the government wants to stimulate consumer spending, it may cut taxes. A tax cut provides extra money for families, which the government hopes will, in turn, be spent on goods and services, thereby spurring the entire economy. Spending is used as a fiscal-policy tool to drive government money into certain sectors that need an economic boost.

Fiscal policy's most immediate effect is changing aggregate demand for goods and services. For example, a fiscal expansion raises aggregate demand via one of two channels. First, if the government increases its expenditures but leaves the taxes stable, it would directly boost demand. Second, if the government cuts taxes or increases transfer payments, the disposable income of households increases and they are going to spend more on consumption. This rise in consumption would elevate aggregate demand in turn.

Fiscal politics also affects the exchange rate and trade balance in an open economy. The rise in interest rates due to government borrowing attracts foreign capital in the case of a fiscal expansion. In their attempt to get more dollars to spend, investors are biding the dollar's price, triggering a short-term appreciation of the exchange rate. This appreciation makes imported goods cheaper in the United States and exports more expensive abroad, which results in a decline in the trade balance of merchandise

Fiscal policy is an important tool for economic management due to its ability to affect the total quantity of output produced that is, gross domestic product. A fiscal expansion has the first impact of raising demand for goods and services. This greater demand leads to higher output and price increases. The extent to which the higher demand increases output and prices, in turn, depends on the state of the business cycle. If the economy is in recession, with unused productive capacity and unemployed workers, then demand increases would likely lead to more production without increasing the level of prices.

The U.S. debt is the amount of all unpaid federal government debt due. It reached $24 trillion on April 7, 2020.The U.S. The Department of Treasury monitors the estimated unpaid gross public debt, and this number varies regularly. The New York debt clock also tracks that clock. The economy and voters benefit from deficit spending in the short term, because it drives economic growth and stability. For defense equipment, health care, and building construction, the federal government pays, and contracts with private firms that hire new employees. Then, these new employees spend their government-subsidized salaries on gasoline, grocery stores, new clothes, and more, boosting the economy.

In addition , lower demand for Treasurys brings downward pressure on the currency. The value of the dollar is bound by the value of Treasury Securities. As the dollar declines, foreign holders are paid back in less-value currency. That further reduces demand and many of those foreign debt holders are more likely to invest in their own countries.