Fiscal Policy and how How Governments use Fiscal Policies

Fiscal Policy

Student’s Name

Institution

Fiscal Policy

Fiscal Policy is the regulated variation that a government can employ to its taxation and spending systems so to stabilize economic activities and manipulate the Aggregate Demand (AD) within its borders. In other words, it is the manipulation of the gap between spending and taxation to impact on the macroeconomic conditions. The concept is an important governance tool that determines the economic prowess of a country and directly affects other policies like economic integration and even the levels of industrial growth. It also significantly factors into concepts like the GDP and National Income. Countries that enjoy economic stability have strong fiscal policies (Cottarelli, Gerson & Senhadji, 2014).

How Governments use Fiscal Policies

Inflationary gaps that determine the rate of economic growth within a country can get controlled through contractionary application of fiscal policies. In so doing, a government would reduce the level of spending within the borders and, as a result, curb the rates of economic growth. Contractionary fiscal policies get effected through strategies that may include an increase in taxation levels that deprives citizens of their spendthrift demands. As the consumers demand less of the products and services, the aggregate demand curve drops (Cottarelli, Gerson & Senhadji, 2014). Alternatively, a government can reduce its spending rates and factor into the issue implementation of monetary policies that limit the circulation of money. Such duties are always the deliberations of the Central Banks.Loading…Loading…Loading…Loading…

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The other significant use of fiscal policy is its projection to reduce the rates of economic recession. Strategies that get used in such cases target to improve the spending capacities of the citizens. For instance, alterations may be made to reduce the taxation levels and place more money at the citizens’ disposal for spending. Alternatively, a government may seek to improve the infrastructural capacities of the country as it targets to create employment opportunities. Such adoptions of the policy always get controlled because too much spending can instead spur inflation rates. When applied in this sense that elevates the demand curve, the concept is termed as expansionary fiscal policy. Controlling the rates of recession should be inspired to create a permanent increased demand for products. Otherwise, strategies that are reputed to serve only on a temporal basis can either render the economy static or have no impact at all (Cottarelli, Gerson & Senhadji, 2014).

Conclusion

The significance of fiscal policies is eminent as governments have used them to inspire business cycles to stability and also to manipulate the rates of interests. Fiscal policies define the drastic measures that are taken by governments in their aspirations to ensure economic stability and maintain or even improve their competitive edge in international businesses. Though it has its ills as well, it has been the tremendous mark of difference between the strong economies and the weaker ones. The way the policies impact on the stability of a country by dictating directions for its economic growth depend on several other factors inclusive of administrative and legislative influences. Restoration of an economy is an evolutionary process and, therefore, the application of a fiscal policy may take time to exhibit positive signs. Nonetheless, the efficiency of an applied policy would only be pragmatic if the past government’s projections have had positive hallmarks. For instance, a tax cut cannot inspire spending wholesomely if previous actions by the government indicate a tendency to implement only makeshift cuts.

Reference

Cottarelli, C., Gerson, P. R., & Senhadji, A. (2014). Post-crisis fiscal policy.