Joe Liang

Fiscal Policies

2 min read

Concerned with the spending of government budget to manipulate Aggregate Demand. Sources of revenue:

  • Taxes: a big one
  • Sale of goods and services: Transportation
  • Government owned assets Expenditures:
  • Day-to-day: subsidies, provision of public services
  • capital expenditures: producing physical capital or investing
  • Transfer payments: payments to vulnerable groups

Goals

Pretty much the same as Objectives. Its just that there is no specific inflation targeting. There is the additional goal of equitable distribution of income.

Methods

Evaluation

Constraints

  • There are time delays to find the problem, decide on the solution, and the policy taking in effect in the economy. Months may pass, while the problem changes in severity and the solution may not be the most appropriate.
  • Political constraints: the public may be unhappy with cuts, increases in taxes, and so on.
  • Leads to debt since fiscal policies spend money through borrowing
  • Tax cuts are ineffective in recessions since no one wants to spend anyways.
  • Inability to fine tune
  • Inflationary if aggregate demand increase beyond what is necessary. Similar to Monetary Policies!
  • Can’t deal with supply again
  • There can be Crowding out. A cool and useful concept!

Strengths

  • Pulling economy out of deep recession. Until the Great Depression, economists, mostly monetarists, believed market fluctuations were self correcting. Keynes stepped in to prove otherwise. Similar situation occurred in 2008 Great Recession.
  • Ability to target sectors of the economy.
  • Direct impact, instead of taking in between steps like in Monetary Policies
  • Could even potentially move LRAS!! Now that is some good for the economy.
  • Automatic Stabilizers. They only make fluctuations milder. They lead to inevitable government debt.

Overall, fiscal policies are more important in deep recessionary periods. Subsidy RWE

Graph View

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