What are the effects of fiscal policy?

Fiscal policy is a key instrument of macroeconomic policy and consists of government expenditure and tax policy. As government expenditure on goods and services increase or reduce tax revenue collection, it is called expansive or reflation attitude. Higher taxes or lower government expenditure are called contraction policy. The effects of fiscal policy may be neutral income , which means that any change in expenditure is balanced by the same and opposite change in income collection. However, even with the attitude of neutral fiscal revenue policy, the government has a powerful tool that affects both individuals and business according to the type of expenditure changes or tax policy it carries out.

Expansive policies can result in a deficit of the government budget, although not always. If the economy is relatively healthy when increasing expenditure, any excess budget will be reduced, but not necessarily eliminated. The attitude of the policy of contraction can lead to budget surpluses, especially if the budget is of valuation. Effect on the deficit of the budget inHowever, both cases depend on the original budget, the size and direction of the change of fiscal policy.

When the government increases expenditures without changing tax policy, the summary demand will move up. It is an expansive policy that leads to a higher gross domestic product (GDP) and a higher level of employment and production in the economy industry where the government spends. The key recipients are generally defense industry and related suppliers. There are other effects of fiscal policy, as workers spend more in these industries, increasing sales and hiring in all areas of the economy.

If the government reduces taxes and at the same time keeps the expenditure constant, there will be a shift in a summary demand or supply depending on which type of taxes has been reduced. If wage taxes and individual income tax rates are reduced, consumers will have more income that you can spend on all types of goods andServices, which increases aggregated demand. If the income tax rates are reduced, businesses are likely to expand and hire more workers and expand the summary offer as soon as more goods are produced. Because these workers increase their own consumption of goods and services, the aggregated demand is also increasing, resulting in a higher level of GDP and price.

If the economy is in the recession, the expansion effects of fiscal policy may return the unemployed individual back to work, with a small or no influence on interest rates or inflation. However, if the economy is strong or is low unemployment, increased government expenditure may cause the economy to overheat, stress production capacity, or cause wage to occupy vacancies, which can lead to inflation and higher interest rates. This is called extrusion , in which government expenditures force private expenses and invest higher prices and interest rates. In the inflation economy, the government often attempts to use fiscal policy, andwould reduce prices, reduce its own expenditure or tourist tax rates.

Fiscal policy can be very finely tuned by focusing on specific companies, individuals or behavior. For example, to stimulate the housing market, the government may decide to provide large tax deductions to people who buy a house. To increase investment in agriculture, it will have a positive effect of introducing low tax rates on farmers and agricultural companies. On the contrary, governments can tax undesirable behavior, such as higher tax rates for certain business or goods such as cigarettes or alcohol.

Other effects of fiscal policy are the composition of aggregated demand. GDP consists of government expenditure, business expenditure, individual consumption and net exports. Fiscal policy of increased expenditure can lead to government expenditure is a greater percentage of GDP. The target changes of tax policy will lead to a change in the proportion of production -ascribed business or individual expenditure.

one key problem with the effects of fiSkal policy is a delay from the time when policy changes are made until individuals or businesses change their behavior, and secondary delay until changes in behavior affect the economy. If policy changes are considered short -term, neither businesses nor individuals cannot change. In the case of special deductions of taxes, however, people and business tend to act immediately to take advantage of what can be a temporary change.