The Role of Fiscal Policy in the Economy

Click on the links below and Read the articles. You can also use pdf. files with the articles posted in Content - Week 6 - Articles for Discussion week 6 area.

• Fiscal Policy: Economic Effects

https://fas.org/sgp/crs/misc/R45723.pdf

• Fiscal Policy: Taking and Giving Away by Mark Horton and Asmaa El-Ganainy

https://www.imf.org/external/pubs/ft/fandd/basics/fiscpol.htm

In your initial response to the topic you have to answer all questions:

1. Discuss the effect of fiscal policy on interest rates and investment. Explain crowding out effect.
2. Discuss the effect of fiscal policy on inflation.
3. Discuss the effect of persistent fiscal stimulus on the economy in the long run.
4. Describe the mechanism how changes in fiscal policy affect output and prices in the economy.
5. Reflection - the students also should include a paragraph in the initial response in their own words, using macroeconomic terminology, reflecting on specifically what they learned from the assignment and how they think they could apply what they learned in the workplace or in everyday life.

1. Fiscal policy is the process of changing government spending and revenue behavior in an effort to influence economic outcomes (Weinstock, 2021). The government can utilize either expansionary or contractionary fiscal policy, dependent on whether they need to spur or slow economic activity. If the government borrows a larger portion of the global pool of savings, then it can increase the demand for these funds. As the demand increases, without any increase in supply, the interest rates on these funds will increase. From this, it is more expensive for businesses to borrow money and invest in their firms, and individuals decrease interest-sensitive spending (Weinstock, 2021). These higher interest rates diminish private sector spending and can cause something called crowding out. The degree of crowding out depends on where the economy is in the business cycle (Weinstock, 2021).
2. Fiscal policy can cause inflation to increase or decrease. If fiscal stimulus is applied too aggressively or when the economy is already operating near full capacity, fiscal stimulus can result in too high of demand for goods and services that the economy is unable to supply (Weinstock, 2021). This can lead to an increase of inflation, because as demand increases, then prices increase too. On the other hand, when financial stimulus is withdrawn, demand for goods and services decreases, which slows inflation (Weinstock, 2021).
3. Fiscal stimulus can impact the economy in undesirable ways, from interest rates and investment to the inflation rate, as discussed above. Large budget deficits can result in a rising debt-to-GDP ratio and lead to an unstable level of debt (Weinstock, 2021). Persistent fiscal stimulus can limit long term economic growth by crowding out private investment, especially if done during economic expansions (Weinstock, 2021).
4. Fiscal multipliers measure the ratio of a change in economic output to the change in government spending or revenue that causes the change in output (Weinstock, 2021). For example, a multiplier greater than 1 indicates that for each dollar the government spends, the economy grows by more than one dollar. For a multiplier less than 1, every dollar the government spends, the economy grows by less than one dollar. Multipliers are larger if there is less leakage, monetary conditions are accommodative, and the country's fiscal position after the stimulus is viewed as sustainable (Fiscal Policy: Taking and Giving Away, n.d.).
5. Reflection-Throughout this reading, I learned more about how the government steps in to adjust the economy. It is important for the government to be aware of the current economic situation and either increase or decrease the fiscal and monetary policies in order to increase or decrease inflation in the country. Throughout this post, I focused mainly on increasing fiscal policy and fiscal stimulus. If used appropriately, increasing fiscal stimulus can positively impact the economy and essentially course correct for growth.

respond with value added comments based on peers' reflection!!