Day 217 The fiscal policy

The fiscal policy

The fiscal policy is the economic policy imposed by government focus on the economy's stabilization.

 Generally, it aims to pull the country out of recession. It can be done with two methods. Firstly, the government can increase in its aggregate expenditure. Under the assumption o Keynesian model, it will pull the PAE cure up-ward vertically, so the planned aggregate expenditure will match the potential output quantities. In addition, the government can vary the tax rate, which indirectly affect the aggregate spending. As we learned in chapter 7, the induced factor of the PAE is expressed as(c-m)(1-t), therefore, the change in t will vary the slope of PAE, which is straight-forward, since the less tax charged on income, the more income can be spent. The transfer payment such as baby bonus is a balanced budget multiplier and will actually reduce the output. Because the reduction on exogenous components in tax is financed through the reduction in government spending, but the increased amount is combined with the savings plus additional spending.()The fiscal policy can affect the potential output by investing in public capital, which will raise the economy's productivity. However, the prolong legislative process reduces the flexibility for fiscal police to react timely as a stabilization tool. Furthermore, the fiscal policy creates budget deficits that decrease national savings to benefit the economy in the future. Although with these shortages, it is still an important stabilizing force, due to the automatic stabilization function. When there is a recessionary gap, the tax collection falls automatically, while other welfare transfer payments rise without explicit actions by government. Moreover, the fiscal policy can be used to against the deferred long-term contraction. Income in equalization has been a problem to industrial countries over many years, and the specific fiscal policy such as the progressive tax system will help to redistribute wealth. We should use the Gini coefficient and the Lorenze curve to gain a visualized idea of a society’s inequality. The lower the Gini coefficient the more equal we would say is the distribution of income. Related to the fiscal policy, the tax smoothing theory states that the government should run a budget surplus to save for the future anticipated high spending. The government spending has to be financed either through raising taxes or by government borrowings. With the same equation, we can conclude that if the government keeps running a budget surplus( where tax collected can cover the spending and transfer payments), the public debt will eventually be fully paid off. That is crucial to the concept of inter-generational equity. In conclusion, conclusion, the fiscal policy acts as the stabilizer of economy and society, it has to deal on the problems corresponding to the demo-graphical changes, as well as, the economy's recessions.